The fight to be KS Li’s tenant, cont’d

Whoever is writing the script for the trial of Bo Xilai deserves an Academy Award for Best Half-Convincing, Interests-Satisfying Screenplay. He has to get the audience to believe that this is about corruption rather than a top-level power-struggle. He has to convey the impression that the corruption is millions-of-Yuan/son’s-African-vacation serious, not billions-in-assets/people-tortured-to-death serious. He has to at least hint at the possibility that this is an exceptional case, but not so much as to strain credibility. He must write a half-sympathetic, alternative view into the plot to cater for Bo’s extensive fan club of crotchety old poor people and demented leftists.  And he must make it look like it’s not scripted, to the extent that a few onlookers might even scratch their heads and wonder if they are witnessing unprecedented transparency in China’s joke judicial system. So far, he’s done an excellent job.

Back in Hong Kong, where plundering of the public’s wealth is legal and institutionalized, the South China Morning Post ponders the possibility that the sale of the Park N Shop supermarket chain could result in one player controlling over 50% of the market, thanks to our lack of serious competition laws. That would be the outcome if China Resources, who already have a chain of convenience stores here, were to buy Li Ka-shing’s network of grocery emporia. The paper points out that fellow-duopolist Wellcome could in theory acquire its rival and gain a 75% market share with regulators’ blessings.

The latest mutterings point to China Resources as the most likely buyer. Korean conglomerate Lotte seem to have backed out (shame – I was hoping for a better range of kimchi), seeing the price as too steep and/or the potential for growth in this small and mature market unattractive. China Resources recently relieved British chain Tesco of its Mainland network, and the two could combine to buy Park N Shop. It is a big state-owned Hong Kong-listed monolith, of the sort that on occasions make hasty or not especially well-considered investment decisions, especially overseas.

A certain amount of rashness could be important. There are two fairly good reasons for China Resources to buy Park N Shop. One, attractive to Aeon, Walmart and all potential bidders, is the fact that the chain is part of a duopoly, offering not only a half-captive market, but opportunities to boost efficiency in one of Hong Kong’s many fat and lazy cartelized businesses. The other is that China Resources already has a big Mainland network of supermarkets, which some observers think offers real potential for synergies, presumably in areas like sourcing and distribution; some optimists also think China Resources lust after Park N Shop’s management and branding expertise, and who are we to doubt it? (Investment bankers trying to get foreign retailers interested in ParkNShop are claiming that a foothold in Hong Kong will open the door to unimaginable expansion and riches in the Mainland – but they would, wouldn’t they?)

The big downside is still that any buyer faces the nightmarish reality of Hong Kong rents. A lot of Park N Shop branches are in properties owned by Li Ka-shing, who is merciless enough on yield-per-square-foot even when he is renting to himself. Never underestimate a Hong Kong landlord’s ability to squeeze every available drop of profitability from a tenant. It is possible that China Resources’ political connections du jour would incentivize Li to do a sweetheart deal, but that sort of thing can work both ways; as it is, the company’s big boss is facing allegations of jiggery-pokery.

One way out of the rent quandary is for the buyer to take a 50-60% stake and leave Li with a big enough holding to keep him a friendly landlord; to the extent that the Li family have and will keep their uber-tycoon status, with other businessmen and officials lining up to lick their toes, this could be a useful partnership in other ways. But that’s from the buyer’s point of view; if Li wanted to stay in slow-growing Hong Kong supermarkets, he wouldn’t be selling. I declare the weekend open with the thought that it all depends on whether someone’s dumb enough to stump up a whole US$4 billion (approx).

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11 Responses to The fight to be KS Li’s tenant, cont’d

  1. More serious is the buying up of the media in Hong Kong.

    The Chinese Government has earmarked a small proportion of seven trillion (that’s the figure I heard) yen propaganda budget into buying up Hong Kong media. Nothing influences journalists like an employment contract.

    Mainland-aligned gentry like the most idiotic young Li is meanwhile rumoured to be buying up more of the Digital Broadcasting Corporation.

    And our own Jimmy Lai’s wife is so terrified by recent patriotic triad threats that he has been told to sell Apple Daily double quick.

    These developments seems more worrying than the price of cheese.

  2. PCC says:

    If mainland-friendly interests nearly bought Mr. Lai’s Taiwan media interests for US$600 million earlier this year before backing out at the last minute, how much would Party-friendly interests pay to shut Mr. Lai up in his main market, Hong Kong? US$2 billion? More?

  3. Bela Deepthroat says:

    The figure I heard was 0.2% devoted to Hong Kong. That would cover it I guess.

  4. Funboy3 says:

    Lets see who is dumb enough to buy P&S, it could prove interesting.

    Best case scenario is a powerful mainland company get suckered into paying over the odds & after being bled dry by their landlords, raises a stink with central govt about how imbalanced HK has become and the over reaching power of the property tycoons.

    It could lift the veil that seems to cover the eyes of HK & Mainland Govts that expensive real estate in HK is holding back our economy & there is no realistic plan B.

  5. Gweiloeye says:

    USD4 billion for what – a brandname and the stock on the shelves – what other assets they got – they rent their premises so no property assets. goodwill (yeah like there’s any of that) or future profits (how far in the future you got to go to reach USD4bill).
    Obviously I am no business brain, I’m sure some guru can explain it to me.

  6. G. Hova says:

    Gweiloeye

    They own some of their premises. But basically it is $4B for the right to continue to gouge the approx one-third of the HK public who shop there for daily necessities. In perpetuity.

  7. Local Tax Payer says:

    Bela seems to be making sense (but why no forum on his website?). There must be a limit to what can be paid for newspapers, though, as otherwise wouldn’t people set up new ones? People brave enough to face intimidation and with deep enough pockets, it goes without saying.

  8. PCC says:

    The other obvious point about a PNS acquisition is, who in their right mind would want to be on the buy side of a deal when the canny Mr. Li is on the sell side?

  9. G. Hova says:

    PCC- because they are clueless cashed up thickheads coming late to the table.

  10. probably says:

    The price for PnS was originally only going to be $2b until they called up their friends at Welcome and agreed to mark it up.

  11. Michael Milken says:

    Brilliant! I can’t think of a better way to rid ourselves of half the mainland “tourists” in one full swoop than to introduce a mainland shopping chain that imports cardboard dumplings and melamine-flavored baby powder directly into Hong Kong shelves. Can’t wait. Now, if we could get some enterprising Chinese start-up that specializes in “novelty” time-keeping devices, Rollex… Ghucci, Luminous Villon etcetera, that should kill off the other half and we might be left alone again.

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