Sometimes distributions in specie are viewed in a less favourable light. Why would a company divest its assets to its shareholders? Whatever the reason, the company announcing the divestment usually experiences a short-term bounce. Will this last?
On Aug 12, Pacific Century Regional Developments (PCRD) announced that its board is proposing to jointly distribute a specie of 132.4 million stapled units by HKT Trust and its management company HKT Management. The HKT Trust units owned by PCRD represent around 1.75% of HKT Trust’s stapled units (HKT stands for Hong Kong Telecom). The Hong Kong Exchange’s (HKEx) trust structure differs from Singapore’s in that HKT Trust — and its management company HKT Management — were established as a single investment trust, hence the stapled units. The share stapled units jointly issued by the HKT Trust and HKT are listed on the HKEx.
Since PCRD is listed on the Singapore Exchange and HKT Trust is listed on the Hong Kong Exchange, PCRD says shareholders can elect to receive cash. This option provides flexibility for shareholders who do not wish to hold the stapled units listed on the HKEx or whose entitlement to HKT Trust units may be uneconomic to trade. The cash option will be equivalent to the value of shareholders’ entitlement in the proposed distribution. The proposal is for shareholders of PCRD to receive 0.05 HKT stapled units for each ordinary PCRD.
PCRD says the rationale for the distribution in specie is to simplify its company structure. PCRD’s significant investment is a 22.66% stake in Hong Kong-based information and communications technology company PCCW, which owns 51.91% of HKT Trust. PCRD also holds a direct minority stake of 1.92% of HKT Trust’s stapled units. Following the proposed distribution of HKT Trust units, PCRD would focus on PCCW. Since the start of the year, PCRD has outperformed HK Trust.
On Aug 14, Straits Trading Company also announced a distribution in specie of a company listed on the HKEx, ESR Group. According to Straits Trading’s announcement, shareholders may elect to take up to 62.76 million ESR shares valued at $217.9 million or approximately $0.50 per ordinary share issued in the capital of Straits Trading itself. The latter will be new shares issued by the company.
On Jan 20 this year, ARA Asset Management was acquired by ESR Group, where the consideration was satisfied by new ESR shares and cash in a 90:10 ratio, respectively. As a result of its investment in ARA, Straits Trading was issued 214.7 million ESR shares. Straits Trading shareholders may elect to receive either 145 ESR shares or 180 new Straits Trading shares for every 1,000 Straits Trading shares owned at the book closure date to be determined.
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“This dual arrangement offers shareholders flexibility in deciding how they would like to participate in Straits Trading’s growth, especially for shareholders who may not hold a Hong Kong trading account or Hong Kong-linked brokerage account,” the Straits Trading announcement says.
The proposed distribution ratio’s valuation of $0.50 per Straits Trading share is based on the closing price of HK$19.86 ($3.50) per ESR share on Aug 12. Year-to-date, Straits Trading has outperformed ESR. As a comparison, CapitaLand Investment — a real estate investment manager in a similar mould to ESR — is up more than 12% this year compared to a 24% decline in ESR’s share price performance.
In February, City Developments (CDL) announced the distribution in specie of CDL Hospitality Trusts (CDLHT) to its shareholders. This makes it more efficient for CDL to divest its hotels into CDLHT. Unsurprisingly, CDL has performed better than CDLHT. Ascott Residence Trust, which was upsized as a private placement, has served better in terms of unit price than CDLHT.
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Technically, a distribution in specie occurs when a company makes a distribution of an identified noncash asset without first declaring an amount in cash. Generally, distributions in specie are made when it is deemed more practical to give an asset rather than currency.
Over the years, local investors have benefited significantly from distributions in specie. CapitaLand Commercial Trust was a distribution in specie to CapitaLand’s shareholders in 2004, and it started trading in May of that year. Subsequently, CCT was merged with CapitaLand Mall Trust and is now CapitaLand Integrated Commercial Trust (CICT), the second largest REIT by market capitalisation and assets in Asia.
Keppel REIT (then known as K-REIT Asia) was given as a distribution in specie to shareholders of Keppel Land in 2006. Keppel Corp privatised Keppel Land in 2015. Keppel REIT is Singapore’s only pure play office REIT.
In the short-term, investors may view distributions in specie as companies acting in their own interests rather than shareholders’ interests. But there have been examples of very successful divestments where shareholders have clearly made significant gains. CICT and Keppel REIT are such examples.
