Li Ka-shing still has options after ParknShop flop

October 21, 2013

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Li Ka-shing’s sale of ParknShop has flopped, but he still has other options. The tycoon’s holding company, Hutchison Whampoa, shelved a potential sale of the Hong Kong supermarket chain, after targeting an ambitious valuation of over $3 billion. But there are other ways to raise funds. ParknShop might be more palatable if Li can bundle it up with more attractive assets from his group.

ParknShop should have had a strong appeal for buyers, with its 7 percent EBITDA margin and strong grip on the Hong Kong market. It had around 40 percent share of the city’s supermarket sector in the first half, according to Nielsen Homescan. There’s even room for steady growth if consumers continue to turn away from the city’s open-air wet markets.

The failure to seal a deal with any one of four bidders, who included Thailand’s CP Group and state-controlled China Resources Enterprise suggests price expectations were too high. A valuation of $3 billion to $4 billion for ParknShop implied a rich multiple of 17 to 22 times trailing EBITDA. Singapore’s Dairy Farm, which owns rival chain Wellcome, trades on 20 times but with pan-Asian operations and higher margins. Global rivals Tesco and Carrefour trade around 6 times trailing EBITDA.

Li’s next move could be to repackage ParknShop with other bits of his retail empire, A.S. Watson, most of which has higher margins than the Hong Kong chain. If A.S. Watson could attract the same 12 times trailing EBITDA multiple as U.S. food-to-healthcare chain Walgreen, it would be worth at least $19.7 billion – even without a premium for faster growth from Asian markets. Hutchison Whampoa could in theory float just a 25 percent stake of the retail business and raise more than it would have got from selling the whole of ParknShop, without giving up control.

Hong Kong’s best-known mogul built his empire by buying fast-growth businesses at the bottom and selling low-growth businesses at the top. Perhaps buyers have grown wise to his tactics, particularly when it looks like he is selling out in the market he knows best. If he wants to raise cash, Li may have to spruce up his offering.


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