A journalist takes a photo of a Guangzhou Automobile Group Co car at the 2009 Shanghai Auto Show. Guangzhou Automobile Group Co, the mainland partner of Toyota Motor Corp and Honda Motor Co, has offered to buy out Denway Motors. Raul Vasquez / Bloomberg News

Denway shares plummet by 24% after news of GAG offer

Guangzhou Automobile Group Co, the mainland's sixth largest automaker, has offered about HK$26 billion to buy out minority shareholders of its Hong Kong-listed Denway Motors Ltd unit.

Guangzhou Auto offered to buy the 62 percent of Denway it doesn't own to consolidate operations as part of a plan to list its own shares in the Hong Kong stock exchange by the end of June.

Denway's minority shareholders were offered 0.37861 of a Guangzhou Auto share for each share of Denway they hold.

Shares of Denway Motors plunged 24 percent to HK$3.41 on Wednesday, the most in 19 months, after Guangzhou Auto's all-stock offer valued the company at as much as HK$41.2 billion or HK$5.49 per share - 20 percent more than Denway's April 28 closing price, the last day of trading before it was suspended.

"Denway's shares plunged because investors were disappointed. They have been expecting a much higher premium," Dickie Wong, research director at Kingston Securities Ltd, told China Daily.

The 0.37861 swap ratio implies that a Guangzhou Auto share is worth as much as HK$14.49, which translates into a 2010 price-earnings ratio of 12.5 times, which is higher than the 10 times P/E ratio of Dongfeng Motor Group Co Ltd, a comparable peer. This means Guangzhou Auto is overpriced compared with Dongfeng, to the disadvantage of minority shareholders of Denway.

"The offer will be more attractive if it includes a cash portion," said Wong, who foresees only a 50 percent chance for the approval of the deal by minority Denway shareholders.

Eugene Law, research head at Celestial Asia Securities Holdings Ltd, also cited the "low" premium for the plunge in Denway shares.

"The market is always right," he said, noting that investors showed their disapproval by selling down the share.

However, the management of Guangzhou Auto said the deal offers Denway shareholders a "compelling opportunity to better participate in the growth across the entire auto value chain in China".

China has become the world's fastest growing and largest auto market in terms of production and sales last year, vaulting ahead to surpass the US.

"The share swap ratio for conversion of Denway shares is reasonable and attractive to investors," Lu Sa, secretary to the board of directors at Guangzhou Auto, told a press briefing in Hong Kong Wednesday.

"My confidence is relatively high that rational shareholders will all support the deal," Guangzhou Auto Chairman Zhang Fangyou told the same press briefing.

Both Law and Wong also said Denway has also been catching up with the across-the-board declines in auto shares over the past two weeks while it was suspended from trading pending the announcement on the privatization offer.

BYD Co, the automaker backed by Warren Buffett, has dropped over 15 percent and Geely Automobile Holdings Ltd is down more than 20 percent since Denway's suspension.

Meanwhile, Guangzhou Auto is seeking a listing in Hong Kong by the end of June, Lu Sa, secretary to the board of directors, said at the Wednesday press briefing.

The Guangzhou-based automaker has submitted a listing application to Hong Kong's stock regulator in January, with a plan to list its shares by way of introduction.

Selling shares on the mainland will depend on the stability of the market, Zhang said Wednesday. The company may attempt another capital-raising move should it need to expand and increase market share, he said.

China Daily/Bloomberg News

(HK Edition 05/20/2010 page3)