A Wealth Creation Journal

Live Portfolio Update – 2021 – #13 (Soho China)

Bought a 3% position in Soho China at HKD 4.45. This is a simple merger arb and I see it as a better-than-cash investment opportunity.

Blackstone is making an all-cash offer for Soho China at HKD 5 per share which translates into an 11% upside from current share price of HKD 4.5.

Time to closure: I expect the deal to complete within 8 months which gives a pretty decent 15+% IRR. There is some risk that this deal could take longer

Probability of Success: 90%.

  • Blackstone is a reputable real estate PE firm and the founders of Soho China are very well-known figures within the Chinese business community. I think it is very unlikely for the deal to fall apart.
  • The price seems to be fair for both parties. Blackstone can see some upside from this transaction as there should be quite some room to improve rental income by improving occupancy rate and general recovery from COVID-19. And maybe there is a little upside from rerating from cap rate. The current cost of debt is ~5% and Blackstone could probably lower it once they gain control. Finally there should be some 2-3% of the like-for-like rental price growth annually
  • For Mr and Mrs Pan, this is a reasonable valuation for them to exit the business. Building office space seems to be a very structurally challenging business in China due to intense competition and the rise of shared working space. Soho China’s premium office space positioning has helped to insulate them from the most intense price competition.
  • Given that it seems like a fair deal, then both sides should be motivated to close this transaction.
  • I don’t see material regulatory issues as Soho China’s market share is low and office space is not a sensitive sector
  • There is a general risk of unanticipated events happening and I am not too intimate with the parties involved

While the probability of failure is low at 10%, the downside from the deal not going through is very high at over 50% using the pre-announcement share price of HKD 2-3.

All things considered, I am only committing 3% capital as I would not consider Soho China a favorable long-term investment in the case of deal failure.

2 Comments

  1. AP911

    Blackstone tried to buy the company at higher valuation last year but the deal fell through, is this time different?

    • XC

      Yes you are right. The deal was rumoured last time and this time the deal is official. So i guess the lower price is the result of an ongoing negotiation and the parties have probably reach a substantive agreement to finally make the deal official. That said the risk that deal fell through is always there

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