Hong Kong Tycoons to Sell $8.4 Billion in Assets to Cut Debt

(Bloomberg) — Swire Pacific Ltd. has become the second notable Hong Kong company to announce plans to offload assets in as many days as part of efforts to reduce debt in the face of rising borrowing costs.

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The conglomerate announced late Wednesday it will sell its US beverages business to its controlling shareholder run by the wealthy Swire family for $3.9 billion. The sale would lower one measure of the company’s indebtedness by more than one-third, it said in a statement. The firm also proposed a special dividend of about HK$11.7 billion ($1.5 billion), representing about half of the expected gain from the disposal.

The deal came a day after the billionaire Cheng family announced a similarly structured $4.5 billion deal to buy a unit owned by builder New World Development Co. The move would effectively shift cash from the family’s investment holding company to New World, which is one of the city’s most indebted real estate firms.

Rising borrowing costs are making it tougher for firms across the globe to juggle their debt loads. In Hong Kong, which imports its monetary policy from the US due to a currency peg with the greenback, the one-month cost of interbank borrowing has jumped to about 5% from less than 1% a year ago. A rare downturn in the property market is adding to economic pressures with major developers resorting to providing discounts and various perks to boost sales.

“Both deals make a lot of sense,” said Willer Chen, senior analyst at Forsyth Barr Asia Ltd. The asset sales will generate capital to strengthen the companies’ balance sheets while sharpening their strategic focus, he said.

Investor reaction to the Swire news was positive. The company’s stock price jumped as much as 8.2% Thursday in Hong Kong, the most since August, before paring gains to 5.2%. New World shares are trading below the level before the deal was announced Tuesday.

Read more: Billionaire Cheng Family to Buy Out NWS in $4.5 Billion Deal

Under the agreement, Swire Coca-Cola, USA will be sold to a wholly-owned subsidiary of John Swire & Sons. The US unit produces, sells and distributes Coca-Cola and other beverages in 13 states across western US and will continue to do so after the sale. The conglomerate will still charge an annual management service fee from the US business. The sale is consistent with Swire Pacific’s focus on Greater China and Southeast Asia, the company said.

Profit at Swire Pacific, one of the city’s largest developers and owner of Cathay Pacific Airways Ltd., took a hit from strict pandemic measures. In New World’s first-half earnings, the property firm saw underlying profit fall 14% to HK$3.36 billion due to Covid-19 disruptions.

Recovery has been slow since Hong Kong reopened at the start of the year. Commercial real estate is suffering from a lack of tenants. The overall grade A vacancy rate was almost 15% in April, more than three times the level in 2019, data from Colliers International Group Inc. show.

Read more: Hong Kong Tycoons’ Skyscraper Vacancies Signal Deep Market Shift

Hong Kong’s residential market is showing fresh signs of weakness after a short-lived rebound in the first quarter. Home prices may end the year unchanged from the start of 2023, suggesting a 7% drop, Citigroup Inc said last month. A gauge of second-hand property prices is down 13% from its record in 2021.

Tourism — a big driver of retail sales — remains lackluster. Visitor numbers from mainland China were just 54% of 2019 levels in April, according to the Hong Kong Tourism Board.

At the same time, higher borrowing costs are making it more expensive for companies to service their debts. New World, founded by the late billionaire Cheng Yu-tung, is one of the most indebted Hong Kong developers among its larger peers, with a net debt-to-shareholder-equity ratio of about 47%. The company’s net gearing would decrease to around 42% after the deal.

Asian Focus

Other conglomerates may follow the moves by New World and Swire, Chen said, adding that smaller property developers with low valuations may also consider privatization amid weak market sentiment.

Swire Pacific’s planned sale also reflects the company’s priority on building up its Asian business. Last year, the company agreed to buy Coca-Cola Co.’s bottling operations in Vietnam and Cambodia for about HK$1 billion, marking its first foray into the Southeast Asian beverages market.

The group’s management said on a call that it will retain its Coca-Cola franchises in China, which contributes about half of its revenue from the beverages business, Hong Kong, Taiwan, Cambodia and Vietnam, Goldman Sachs Group Inc. analysts including Simon Cheung wrote in a note on Thursday.

Net proceeds from the asset sale will mostly be used to expand the conglomerate’s core property and beverages businesses, as well as investing in health care in China and Southeast Asia, said Citigroup Inc. analysts including George Choi.

Swire Pacific, one of the last remaining British trading houses in Hong Kong, has been increasingly looking at China for growth. Last year, it committed $15 billion over the following decade to develop its property and health-care businesses in the country.

–With assistance from Charlotte Yang.

(Updates to add analyst quote, share reaction, details from fifth paragraph.)