Li Ka-shing’s sale of the Hong Kong supermarket chain ParknShop has flopped, but he still has other options.
Mr. Li’s holding company, Hutchison Whampoa, shelved a potential sale of chain, after seeking an ambitious valuation of over $3 billion. But there are other ways to raise money. ParknShop might be more palatable if Mr. Li can bundle it up with more attractive assets from his group.
ParknShop should have had a strong appeal for buyers, with its strong grip on the Hong Kong market and a 7 percent margin on earnings before interest, taxes, depreciation and amortization.
It had around 40 percent share of the city’s supermarket sector in the first half, according to Nielsen Homescan. There’s even room for steady growth if consumers continue to turn away from the city’s open-air wet markets.
The failure to seal a deal with any one of four bidders, who included Thailand’s CP Group and state-controlled China Resources Enterprise suggests price expectations were too high. A valuation of $3 billion to $4 billion for ParknShop implied a rich multiple of 17 to 22 times trailing Ebitda.
Singapore’s Dairy Farm, which owns the rival chain Wellcome, trades on 20 times but with pan-Asian operations and higher margins. Global rivals Tesco and Carrefour trade around 6 times trailing Ebitda.
Mr. Li’s next move could be to repackage ParknShop with other bits of his retail empire, A.S. Watson, most of which has higher margins than the Hong Kong chain. If A.S. Watson could attract the same 12 times trailing earnings multiple as the American chain Walgreen, it would be worth at least $19.7 billion - even without a premium for faster growth from Asian markets. Hutchison Whampoa could in theory float just a 25 percent stake of the retail business and raise more than it would have got from selling the whole of ParknShop, without giving up control.
Hong Kong’s best-known mogul built his empire by buying fast-growth businesses at the bottom and selling low-growth businesses at the top. Perhaps buyers have grown wise to his tactics, particularly when it looks like he is selling out in the market he knows best. If he wants to raise cash, Mr. Li may have to spruce up his offering.
Una Galani is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
