MTR Exit
9 October 2007
At today's EGM of minority shareholders of MTR Corporation Ltd (MTRC, 0066), the Hong Kong Government got what it wanted, and the scheme to acquire property and development rights, and to lease a railway business from the KCR Corporation (which will remain wholly-owned by Government) was approved. Predictably, the Government acknowledged the vote not in terms of shareholder interests but in terms of fare cuts and passenger interests. MTR shareholders will now have to pay the price of the Government's more socialist transport policy.
Of the votes cast, some 82% were in favour and 18% against the deal. But that doesn't tell the whole story: the turn-out rate was only 25% of the minority shares. 75% of the independent shares were not voted at all. Normally, in a vote as contentious as this one and in a company with a large institutional shareholder base, you would expect a turn-out rate of around 60%, and most of that comes from institutions, because retail investors have difficulty getting their bank or broker to vote at all and are widely disenfranchised in the Hong Kong corporate voting system. Rather like the political system, really.
So this low turn-out of only 25% of eligible shares tells you that most institutions have already voted with their feet and sold out. The smart money is no longer aboard this train. Since the transaction circular was posted on 3-Sep-07, MTRC shares have gained 35% from HK$18.98 to $25.60. In the same period, the Hang Seng Index has gained only 16%. Volume in MTRC shares was also up sharply. This suggests strongly to us that the Government was calling in favours and lobbying its supporters to buy out the institutional holdings.
Frankly, if the Government had offered to buy out all the minority shareholders in a privatisation (or to be exact, nationalisation) at the current $25.60 a share...heck, let's not quibble, we'll call it $25, then we would have recommended accepting it, because it is a substantial premium to any fundamental valuation. The market capitalisation has risen by HK$37bn since the circular went out, and nobody, not even the MTRC, has claimed that this deal adds $37bn to the company's value.
Your editor has held his retail-sized shareholding since subscribing to the 2000 IPO, never sold a share, and sometimes elected for scrip dividends when the market price was higher than the reinvestment price (as it was most recently). Now we will sell all of them, except for 1 registered share which we need to be eligible to turn up at future AGMs and say "we told you so". That 1 share also gets us discount vouchers for the Airport Express, bless them.
Don't just take our word for it. Morgan Stanley put out research on 5-Oct (when the share price was $25.20) calling the market price "stretched", and setting a price target of $19 per share. And that's from a firm that ought to be bullish - they advised the KCRC on the deal.
© Webb-site.com, 2007
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