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In the wake of the 2008 financial crisis, as demand for high-end consumer goods waned in Europe and the US, a handful of retailers made a bold bet on Asia.
L’Occitane, Prada and Samsonite all chose Hong Kong as the venue for their initial public offerings, listing in the territory in 2010 and 2011.
“The domestic market was booming in China and everybody wanted to take advantage of that,” said a person who advised several companies that made or considered the move at that time. “They thought having investors in Hong Kong would increase their visibility and help sell products in that region.”
More than a decade later, that strategy has aged poorly. Hong Kong’s Hang Seng index has been among the world’s worst-performing major stock indices over the past 12 months, sliding 14 per cent while the US S&P 500 index has risen 16 per cent. China’s growth is slowing and Sino-US tensions show no sign of ending.
Last month, the Austrian billionaire Reinold Geiger, whose L’Occitane Group already owned a 72 per cent stake in Hong Kong-listed L’Occitane International, won over enough minority shareholders to take it private.
It is easy to wonder why the trio of US and European companies have not left Hong Kong sooner. L’Occitane International, which is incorporated in Luxembourg, shows that the answer may lie in technical difficulties.
Geiger did not pursue the take-private through a Hong Kong scheme of arrangement — a process that would need the backing of 75 per cent of shareholders. Because Luxembourg does not have such schemes, and requires a buyer to acquire 95 per cent of shares to force minority shareholders out, doing so would have risked lawsuits from disgruntled European shareholders.
But this decision put him up against a “tender offer” system in Hong Kong that gives high priority to the interests of minority shareholders. A tender offer in the territory requires the backing of 90 per cent of minority shareholders instead of 95 per cent of all shareholders.
That high hurdle means, for example, that any hedge fund with a small stake could threaten to block a deal until they get a higher price.
Geiger managed to meet the threshold last month after offering a sweetener that would give minority shareholders the chance to own a stake in the company even after it delists.
But there was another hurdle. Hong Kong has a process for “squeezing out” dissenting shareholders, or forcing them to sell once the threshold is met. Using that process risks lawsuits from shareholders who might claim it is not a valid process for a Luxembourg company.
Instead, Geiger’s advisers had to win over regulators in Hong Kong and Luxembourg in order to use an alternative: squeezing out the remaining shareholders based on rules set out in the company’s own articles of association. Putting that system in place was a time-consuming and expensive process whose success was not inevitable.
In line with Hong Kong’s rules, the articles provide a two-month period for shareholders to object. Unlike in Europe, where squeeze-outs can happen within days, the process could drag on until the autumn.
L’Occitane Group has clearly deemed it worthwhile to jump through hoops. There is an obvious option available to global companies listed in Hong Kong: delist, then later relist in the US where companies trade at higher multiples.
The alternative is to seek a dual listing. Prada had considered a dual listing in Milan. But its chief executive Andrea Guerra told the FT in May that this was no longer a priority, adding that the technicalities of such a move, among other factors, had put off the plan. Prada said it had no plans to delist.
Samsonite, like L’Occitane, is incorporated in Luxembourg. In March it said it was pursuing a dual listing. On a technical level that might make it easier to later delist in Hong Kong and even be taken private, avoiding the process L’Occitane is going through.
But Samsonite’s articles of association contain provisions similar to L’Occitane’s. That means it could copy what L’Occitane is doing if the company paves the way to delist in Hong Kong successfully.
Ultimately, listing in Hong Kong in pursuit of regional sales was probably not the right call for the western retailers. “I’m not sure that in the long run it produced all the benefits that were anticipated,” the adviser said. “I don’t think Prada had to be listed in Hong Kong in order to be known in China.”