Stockholders to decide fate of K Wah buy - Tuesday 12th of July 2005

K Wah Construction Materials proposed HK$18.4 billion buyout of Galaxy Casino has been a dud on the stock market, but independent shareholders of the company and its parent will decide the fate of the plan tomorrow.

K Wah Constructions stock has lost close to half its value since the buyout plan was unveiled three months ago. As K Wah would pay 80 percent of the deal price using its own shares, this drop has cut the value of the deal to HK$12 billion.

Construction magnate Lui Che-woo and his family are the controlling shareholders of both Galaxy and K Wah Construction Materials and show no signs of backing away from the deal. They and other Galaxy shareholders are to receive a HK$3.68 billion mix of notes and cash, in addition to K Wah Construction shares.

Of the 1.84 billion shares to be issued, 1.16 billion would go to City Lion Profits, a Lui family investment vehicle which has pledged to hold them for at least six months.

The deal values the shares to be issued at HK$8 each, a 50 cent discount off where they traded on the eve of the deals announcement but a huge premium to the HK$4.50 they closed on July 8.

K Wah executives have traveled to New York and London to lobby institutional shareholders to back the deal.

According to stock exchange records, the only substantial shareholder of K Wah Construction stock not a party to the Galaxy buyout is Lim Kok-thay, the chairman and chief executive of Genting, which operates Malaysias only legal casino and controls Star Cruises. In May, Lim bought 86.8 million acquired shares, or 6 percent of K Wah Construction, and presumably supports the companys move into gambling.

The Lui family and other parties to the deal hold two-thirds of K Wah Constructions shares and will abstain from voting on the buyout proposal.

Investors who purchased K Wah Construction stock before rumors and reports about the possibility of a buyout of Galaxy surfaced last October have seen their shares rise from 69 cents a year ago to a peak of HK$11 immediately after the deals announcement. Should the deal be canceled or rejected and the company remain focused on the concrete business, the shares could be expected to sink back below HK$1, giving long-term holders motive to support the buyout, said Kent Yau, who tracks the stock for Core Pacific-Yamaichi International.

The shares of all 22 stocks in The Standard/Bloomberg Macau Gaming Index as well as those of New York-listed Macau investors Las Vegas Sands and Wynn Resorts have all fallen in the period since the announcement of the Galaxy deal due to concerns that gambling revenue growth is slower than last year and that too many projects may be in the works. However, K Wah Constructions drop far outpaces that of other companies.

The outsized decline in part reflects worries that K Wah Construction is paying too much.

The deal circular indicates that the HK$18.4 billion value was calculated based on Galaxys forecast share of the Macau casino market once it completes four projects under development and the expected growth of the market. The deal values the intangible asset of Galaxys right to operate casinos at HK$16.78 billion; its year-end accounts valued its assets at HK$1.5 billion.

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