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Elliott faces uphill battle in Bank of East Asia confrontation

Friday, April 8, 2016 - 06:23

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Elliott Management Corp's attempts to weaken the Li family's hold over Bank of East Asia Ltd face their first public test at the lender's annual shareholder meeting on Friday.

[NEW YORK] Elliott Management Corp's attempts to weaken the Li family's hold over Bank of East Asia Ltd face their first public test at the lender's annual shareholder meeting on Friday. Analysts say it's a battle the hedge-fund firm can't win.

The spat between billionaire Paul Singer's Elliott and the family of BEA Chairman David Li has escalated in recent months as the New York-based firm accused Li and his board of mismanagement and improperly representing shareholder interests. Elliott has called for BEA to explore a sale of itself, and last month voiced concerns over items to be voted on at the annual meeting, including Mr Li's re-election and a general mandate for the Hong Kong company to sell shares.

Elliott's opposition to the general mandate stems from five share sales by BEA since 2007 that have made friendly shareholders Sumitomo Mitsui Banking Corp. and Criteria Caixa SAthe Hong Kong lender's largest investors, insulating Mr Li from activists' demands. The two banks and the Li family own at least 44 per cent of BEA, representing a massive voting hurdle for Elliott, which holds 7 per cent of the lender's stock.

"The chance for Elliott to change anything is very slim," said Edmond Law, a Hong Kong-based analyst with UOB-Kay Hian Holdings Ltd. "Bank of East Asia's shareholder alliance remains very strong. There's not much Elliott can do because the two major investors have no intention to change their view on the company."

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Spokesmen for Tokyo-based Sumitomo Mitsui and Spanish lender Criteria Caixa declined to comment. Guoco Group Ltd, which owns about 14 per cent of BEA, also declined to comment. The remaining institutional and individual investors each hold less than 1 per cent of the stock, data compiled by Bloomberg show.

Elliott was among hedge funds that wrested US$4.65 billion out of the Argentine government six weeks ago. Less than three weeks later, the firm highlighted in a presentationits concerns over granting BEA's board a fresh share-sale mandate, which investors approved at last year's annual meeting.

The board has approved five "selective and highly dilutive" share placements to Sumitomo Mitsui and Criteria Caixa's CaixaBank unit since 2007, which have resulted in a 37 per cent increase in BEA's share count, Elliott said. While the two investors are tied to some shareholding conditions, Caixa recently won a concession giving it more flexibility to consider bids for BEA.

Such share sales ensure that significant amounts of stock remain in "friendly hands" and allow the Li family to retain management control over BEA, Elliott said. David Li's sons, Adrian and Brian, are deputy chief executive officers. The board lacks independent directors, Elliott said in its 12-slide presentation, which included a page purporting to show the business and political connections directors have with each other.

"There is a reason that this company is called family-owned in Hong Kong or family-controlled," said Keith Pogson, a senior partner for Asia-Pacific financial services at Ernst & Young LLP. "That's because they have directly or indirectly basically structured the organization, whether that's the board or whether it's the shareholding, so that they have control."

BEA's board regularly reviews the contributions required from its directors and is confident in the board members' ability to provide suitable time to their duties, the lender said in an e-mailed statement on March 29. The company also said it's seeking to maintain the share-sale resolution to give its management flexibility, especially during times of volatility. A BEA spokeswoman declined to comment further this week.

Elliott launched a legal challenge in January last year against a HK$6.6 billion (S$1.15 billion) placement with Sumitomo Mitsui, arguing that it was against shareholders' interests and should have been more carefully considered by the board. The court ruled in Elliott's favor and granted its request for documents related to the sale.

While Elliott's March presentation acknowledged the judgment, it didn't contain any findings by the hedge-fund firm within those share-sale documents. A spokesman for Elliott in Hong Kong declined to comment on the shareholder meeting.

Even if the results aren't in the firm's favor, it doesn't mean that Elliott will walk away from its investment. BEA's shares have climbed 34 per cent since February when Elliott called on the bank to explore a sale, indicating that some investors are anticipating a bid.

Even after its recent surge, BEA stock still trades below the value of its net assets. A sale would provide shareholders an opportunity to earn a "meaningful return" on their investment, Elliott said Feb 15. BEA rejected the call, saying it intends to focus on improving and executing on what it already has, even as it reported a 17 per cent decline in full- year profit, higher bad loans on the mainland and a hiring freeze.

Elliott has proven it can play the long game - as the 15- year wait for its Argentine payoff demonstrated. While Friday's voting results will give the hedge-fund firm an indication of how effective its campaign against the Li family has been, the ultimate outcomes from the meeting are pretty clear, according to Pogson.

"David Li and his family, along with the Spanish bank and the Japanese bank, basically have close to 50 per cent, if not 50 per cent, of the votes," he said. "It's highly unlikely that you will get a large enough turnout or complete enough turnout to win the resolutions."

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