This is the story of how the undisclosed owner of two BVI companies made a profit of US$84.8m, or 70%, by buying an interest in Container Terminal 3 at a 45% discount to a contemporary valuation and selling it a year later to New World Infrastructure(NWI). The bulk of this stake was sold by Yu Ming Investments Ltd, then known as SHK Hong Kong Industries. As always, we start with the background....David Webb at Webb-Site has long been a good source of interesting information on Hong Kong business and while some time ago in 1999 some interesting involvement from Tony Fung and his then HK listed Yu Ming Investments:
The Yu Ming Sale:
On 9th November 1995, just 23 days after the valuations were published, Yu Ming and others entered into agreements with two anonymous BVI companies called Peak Success Ltd and Enrich Ltd in respect of the sale of a 49.5% interest in RCL. The bulk of this stake, 35.5% of RCL, was sold by Yu Ming. As practitioners will know, one of the great things about BVI companies is that it is impossible to access their share registers without their consent, so they are a dead-end in investigation terms. They can also have bearer shares, with no registered owner.
RCL had 200 shares in issue and Yu Ming sold 71 shares (35.5%) to Peak Success. For each share there was also a shareholder's loan to RCL, but as this is the same for each share, we can simplify the process by treating the entire consideration as being paid "per share" (probably to reduce stamp duty, Peak Success bought the shares while Enrich bought the shareholder loans). Yu Ming also was a sub-participant in a loan to RCL through a financial institution which amounted to about US$271k at 7-Nov-95.
The price which Peak Success and Enrich paid Yu Ming was about US$86.87m. Deducting the small loan sub-participation amount, this reduces to US$86.60m (then HK$669.8m) or US$1.220m per share.
But wait a minute - three weeks earlier, the same interests had been professionally valued at the equivalent of US$2.233m per share. So Yu Ming sold its stake for at a 45% discount to the valuation. Yu Ming was the largest but not the only shareholder of RCL to sell its stake in RCL; other shareholders holding 28 shares, or 14%, also sold on the same terms, giving the buyer a total of 99 shares, or 49.5%. The only shareholder who didn't sell was Sunnet Investment, which as we have noted, was related to New World. Perhaps they didn't like the terms.
That of course made us wonder why New World didn't buy the 49.5% stake instead. As the owner of 41.5%, it would be the natural buyer to increase its stake to 91%. The price paid by Peak Success and Enrich was a total of US$120.8m (HK$933.9m) and the discount to valuation amounted to US$100.3m (HK$775.9m).
Interests in Yu Ming:
The sale of RCL was a "Major Transaction" for Yu Ming, (the proceeds represented 65% of its net assets at 30-Sep-95) but because it was not a connected transaction, Yu Ming was able to obtain written approval from more than 50% (in fact, 58.03%) of its shareholders and thereby avoid a general meeting. The shareholders at the time included Sun Hung Kai & Co. (through various subsidiaries, holding 22.95%), China Poly Group (the People's Liberation Army arm, holding 11.39%) and Tony Fung Wing Cheung (11.39%), who was then, and is now, the Chairman of Yu Ming. Together with Norman Ho (0.96%) these added up to 50.31%, so assuming they consented, another 7.72% of shareholders gave their consent.
At 30-Jun-95, about 4 months before the transaction, the substantial shareholder list had also included Gold Triple Ltd (10.33%) in which both Sun Hung Kai & Co. and New World Development were interested (meaning they owned at least one third of it each- the name suggests a third owner). NWD also had an 8.64% interest in Yu Ming via a company called Concord Associates Ltd, while Tony Fung held no shares at all. Henry Cheng, Peter Cheng and Alexander Chow Yu Chun (all from NWD) were directors of Yu Ming until 18-Sep-95, less than two months before the transaction. Mr. Chow has recently (16-Jun-99) been reappointed to Yu Ming, this time as an "Independent Non-Executive Director".
In the intervening period prior to the RCL sale, Gold Triple and NWD had disappeared from the substantial shareholder list (meaning they were interested in less than 10%) and Tony Fung had increased his holding from zero to 11.39%. Bringing you up to more recent times, as of 31-Dec-98, Mr. Fung had increased his interest to 34.58% of Yu Ming, just below the 35% takeover threshold.
Since the agreement for the sale by Yu Ming of its RCL shares was "in the ordinary course of business", the circular to shareholders describing the transaction did not list the agreement under "material contracts" and therefore it was not included in the documents which were put on display. That's a loophole the Stock Exchange should close.
The conclusion from Webb-Site:
Independent shareholders of NWI must wonder why the company didn't act on the apparent opportunity in 1995, and get the stake at a 45% discount to valuation. Equally, independent shareholders of Yu Ming must wonder why they didn't get the benefit of the 70% premium paid a year later. Meanwhile, the ghost(s) of CT3 are happily counting their US$85m profits.
Update: City Beat at the Courier-Mail also has an interesting post on Aquis that is unlikely to appear at the Cairns Post: "HAS failed Gold Coast businessman Michael King been secretly working behind the scenes as a key consultant on the proposed $8 billion Aquis mega-resort for Cairns?"