There’s a Chinese idiom that says ‘a good horse doesn’t return to old pastures’. The old adage suggests that a person should always look ahead and forge a new path instead of going back to where he or she has been before.
SOHO China clearly is not a believer in the traditional wisdom. That’s because this week it was announced that the developer had accepted a $3.05 billion takeover offer from its former suitor Blackstone.
In May 2020, the US private equity firm was close to buying out the Hong Kong-listed developer (see WiC487) but the deal fell apart as China’s economic outlook got clouded by the Covid-19 pandemic.
SOHO China said in a stock exchange circular in August last year that Blackstone’s courtship had officially ended. Since then, the developer has flirted with other private equity firms such as Hillhouse, although nothing materialised.
This week it was announced SOHO China and Blackstone have rekindled the deal.
The new offer will see Blackstone buying a 63.9% stake held by founders Pan Shiyi and his wife Zhang Xin. The couple will retain a 9% stake in SOHO China.
The developer’s share price had surged nearly 50% last week but Blackstone’s offer values the company at HK$5 apiece, or a 32% premium over its pre-deal share price.
Nevertheless, the current offer is materially lower than Blackstone’s original bid of $4 billion, that was extensively reported last March. This appears to have confirmed reports by local newspapers that Pan is keen to divest and “run away” (a local Chinese phrase that refers to certain tycoons’ desire to move more of their assets offshore and away from China).
“Will Pan ‘run away ‘or not? There is finally an answer for a question that has been raised repeatedly over the last few years,” Sina Finance noted, adding that Pan and his wife have been turning their focus to the property market in New York in recent years.
According to the news website, SOHO China has offloaded nearly Rmb30 billion ($3.33 billion) worth of assets in China in the past five years. The company has not made any acquisitions on home soil during the same period.
The deal will see Blackstone acquire 54 million square feet (5 million square metres) of commercial projects in Beijing and Shanghai. SOHO’s key assets include Bund SOHO in Shanghai and Wangjing SOHO in Beijing, which was designed by the famed late architect Zaha Hadid.
Industry observers reckon that the sale is still a good move for Pan and Zhang at a time when the market for commercial real estate is still struggling to recover after the pandemic.
In 2012 the developer had shifted to a “build and hold” model, with Pan assuring investors that by 2017 SOHO China could pocket up to Rmb4 billion in rental income every year. Pan has since publicly lamented that life as a commercial landlord was harder than expected. In 2020, the nine core property projects held by SOHO China only generated total rental income of Rmb1.5 billion.
At $3.05 billion, the deal marks Blackstone’s biggest real estate investment in China. The transaction also suggests that despite increased fears of the US and China decoupling, deal flows suggest otherwise. “The transaction reinforces Blackstone’s commitment to investing in China, where the firm has been an active investor in real estate for over a decade,” the private equity giant stated in its press release.
The SOHO China sale, however, also marks the end of an era. In 2010, Pan and Zhang were the 51st richest people in China according to the Hurun Rich List. By 2020, the flamboyant couple’s ranking had dropped to 221 (albeit with a – still large – combined wealth of Rmb23.5 billion).
“The sale is something of an epilogue in Pan Shiyi and his wife’s property development career. They will now have only 9% of the company’s equity in their hands, which is nothing of significance, and more of commemorative value. Even if they were to resell the stake, it wouldn’t attract much attention from the public,” Sina Finance concluded.
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