Elliott Management Letter to Bank of East Asia
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We hold over 7% of the ordinary issued share capital of BEA and have been a shareholder for several years.
We believe that BEA shareholders have suffered over many years from an entrenched executive management team which has mismanaged the business, resulting in its weak underlying financial and operating performance and poor returns for independent minority shareholders. We consider that BEA has now reached a stage where the cumulative damage to shareholders’ interests must be stopped.
The current BEA board should finally focus on delivering proper value for BEA shareholders – and in our assessment the only responsible way for the board to do that is to conduct an auction process to explore the scope for a sale of BEA at an appropriate premium.
Underperformance and mismanagement at BEA
BEA shareholders have long suffered from poor returns:
- BEA: Total Annualised Return (“TAR”) of just 2.7% since 19972
- Leading Hong Kong listed banks: TAR of 8.6% since 19973
- Family-run Hong Kong listed banks: TAR of 12.8% since 19974
Based upon TAR over the past 1, 3 and 5 years, BEA has underperformed an index of its peer group Family-run Hong Kong listed banks by 28.1%, 28.8% and 13.1%, respectively.
In our view, this chronic underperformance is attributable to the long-term mismanagement of BEA, combined with the entrenchment of the current executive management team, all of which has come at the expense of BEA's independent minority shareholders and has prevented BEA from being sold at an appropriate premium to its market value, for the benefit of all shareholders.
The serial usage by the BEA board of the general mandate to place new shares on a selective basis to CaixaBank, S.A. (“CaixaBank”) 5 and Sumitomo Mitsui Banking Corporation (and the related agreements between BEA and those shareholders) from 2007 onwards, for “strategic” purposes has, we believe, assisted in entrenching the incumbent BEA management and led to BEA’s chronic underperformance.
Scope for a sale of BEA at an appropriate premium
BEA has failed to demonstrate that it can remain competitive and generate healthy returns for shareholders as an independent bank, in a market where the best performing banks are backed by large foreign or PRC financial institutions. In stark contrast to BEA, most other family-run Hong Kong listed banks were able to provide attractive returns for their shareholders over the last several years, including by way of an opportunity for those shareholders to sell their shares at a significant premium into a takeover offer. Those takeover transactions were priced at an average of 2.0x book value, which for BEA would equate to approximately HK$60 per share6, or around 185% above the current share price.
Regardless of poor performance and poor corporate governance, the scale and profile of BEA’s banking platform is attractive to any potential acquiror who wants to expand its banking operations in the Greater China region. In addition, BEA finally announced on 19 January 2016 that the long-standing lock-in agreement, which had prevented CaixaBank (one of BEA’s largest shareholders) from accepting any non-recommended takeover offer for BEA without BEA board approval, had been removed.
BEA’s management can no longer rely on contractual lock-in arrangements to assist them in preventing a suitably-priced takeover offer for BEA from succeeding.
CaixaBank is clearly willing to sell its 17% BEA shareholding, because it has currently conditionally agreed to sell it to its parent company, Criteria, at just HK$24.257 per BEA share. Consequently, CaixaBank and Criteria may now have an opportunity to agree to put that related party transaction aside and instead sell the BEA stake at a significantly better price, into a takeover offer for BEA made by a third party, thereby strengthening CaixaBank’s capital base.8 In our
In our view, the BEA board should now finally focus on delivering proper value for BEA shareholders, by conducting an auction process to explore the scope for a sale of BEA at an appropriate premium. We have asked the BEA board to do this, but they have so far not responded to our request.