Portfolio | Li Ka-shing-led CKI should raise offer for Power Assets to secure proposed merger

Cheung Kong Infrastructure should sweeten its offer for Power Assets or risk seeing the proposed merger voted down by Power Assets' minority shareholders, analysts say.

"Our discussions with investors suggest that the deal is unlikely to go through at the proposed merger ratio of 1.04 CKI shares for one Power Assets share," CLSA's regional head of Asia-Pacific power research, Rajesh Panjwani, said in a research note on Monday. "We believe it makes more sense for the group to revise the ratio and get the deal done than to let it fail."

He said if the deal was rejected by shareholders, the risk would be the continuation of a "sub-optimal group structure", where Power Assets sat on HK$57 billion of net cash while CKI had net debt and needed to issue new shares to fund any "meaningful acquisition".

Citi's head of Asia utilities research Pierre Lau concurred.

He said in a note on September 18: "Based on our marketing feedback in Hong Kong and Singapore since September 8, we think Power Assets is unlikely to get enough minority shareholder approval for its merger with CKI at the current offer … we think there is a 70 per cent chance [the merger ratio could be raised to] 1.1 to 1.2 before voting takes place in the third week of November."

If the merger ratio was raised from 1.15 to 1.2, CK Hutchison's stake in the merged entity, to be called CK Infrastructure Assets, would fall to around 47 per cent from 49.2 per cent under the current proposed ratio, CLSA analysts calculated.

Approval for the merger requires votes representing more than 50 per cent of CKI's independent shareholders and more than 75 per cent of Power Assets' independent shareholders. The proposal will be rejected if more than 10 per cent of votes from Power Assets' independent shareholders oppose it. CKI and Power Assets did not respond to a request for comment.