Road-Block for Oversea-Chinese Banking Corporation’s Blockbuster S$6.2 Billion Acquisition Of Wing Hang Bank: What’s Going to Happen?

wing hang

Earlier this April, Oversea-Chinese Banking Corporation(SGX: O39), one of South East Asia’s largest banks, announced its plans to take Hong Kong’s Wing Hang Bank private at HK$125 per share (a total of around S$6.2 billion).

Currently, OCBC has obtained more than 50% control of Wing Hang from its founders, the Fung family, and their associates. However, a surprise twist to OCBC’s acquisition has recently appeared in the form of USA-based hedge fund Elliott Capital Advisors which is run by billionaire Paul Singer.

The hedge fund, well-known for being activist investors and for investing in special situations (such as spin-offs), had been buying Wing Hang Bank at around HK$125 per share after OCBC’s acquisition announcement. Elliott Capital Advisors now own roughly 7.8% of the Hong Kong bank.

How might the emergence of the hedge fund affect OCBC?

Hong Kong’s listing rules

At first glance, OCBC seems to have nothing to worry about as the hedge fund only owns a relatively small stake in Wing Hang Bank.

However, for Hong Kong-listed companies, there is a rule that might pose some challenges to OCBC. Firstly, OCBC would need to acquire more than 90% of Wing Hang’s outstanding shares in order for its unconditional privatisation offer to be activated. With Elliott Capital Advisors already owning close to 8% of Wing Hang, OCBC might not be able to garner the required 90% stake that would allow it to fully acquire its target.

Secondly, if Wing Hang remains as a listed entity, it must have a free float of at least 25% as per Hong Kong Exchange’s regulations; that means that OCBC can only own a maximum of 75% of Wing Hang should the latter remain a publicly-listed company.

OCBC’s takeover offer expires on 29 July 2014 – i.e. it has to own at least 90% of Wing Hang by that date or it would need to start paring down its ownership stake to not more than 75%. There’d be a problem for the bank if it gets stuck controlling between 75% and 90% of Wing Hang by the expiration date.

In that situation, OCBC might more or less have only two options: 1) it could purchase at a premium, whatever block of Wing Hang shares that Elliott owns in order to take Wing Hang private; or 2) it could sell its stake in Wing Hang down to the 75% mark.

Under the first option, OCBC might find itself having to cough up more capital to acquire Wing Hang than what it had initially budgeted for. With Singapore’s banking regulators recently looking to increase the capital ratio for banks island-wide, OCBC can potentially be caught in a difficult position in terms of raising the required capital.

With the second option, where Wing Hang remains a publicly-listed bank in Hong Kong, it’s likely that Wing Hang’s share price would fall back to the HK$80 range in which it was trading at prior to OCBC’s acquisition plans. If that happens, there’s a chance that OCBC might need to write down a portion of its investment in Wing Hang in the future, or at the very least, suffer some paper losses.

Foolish Summary

How the event will eventually play out is anyone’s guess. But one thing is for sure: OCBC had invested in Wing Hang with a very long time horizon in mind and would likely not have any desire to dispose of it in the foreseeable future. On the other hand, Elliott Capital likely had invested in Wing Hang with an event-driven investment thesis and I wouldn’t be surprised to see the hedge fund exit Wing Hang once there is certainty over how OCBC will react in the coming months.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.