By John Foley from Reuters
BEIJING – When a company is as big and successful as Tencent, investors rarely notice the small stuff. Few will pay much attention to the Chinese tech conglomerate’s joint HK$750 million ($97 million) acquisition of an unknown financial group in Hong Kong. That’s peanuts for a $191 billion group. Yet this mysterious deal raises questions for Tencent’s outside shareholders.
Tencent plans to team up with Evergrande, a real estate developer, to buy shares and warrants issued by Mascotte Holdings, at a price valuing the whole company at HK$881 million. That’s rather less than the HK$10.3 billion at which the company was trading when its shares were suspended on June 9, after an unexplained run-up. The massive dilution will see existing investors crunched down to just 25 percent.
A closer look at Mascotte shows why its shareholders might be prepared to suffer such indignity. In 2012, the company bought a Taiwanese solar cell materials maker, booking assets worth HK$2.7 billion, only to conclude later that essential trials into its main product had been faked. The scientist in charge, who could not immediately be reached for comment, resigned on the spot, and Mascotte wrote the whole thing down.
Tencent’s attention is quite a reprieve for Mascotte, which at the last count had HK$700 million of convertible bonds due in December. Mascotte can convert the bonds into stock, but if the current deal happens it may not have to. With total assets of just HK$138 million, paying back in cash would not have been an option until now.
What Tencent and Evergrande get is harder to divine. Mascotte these days mainly makes camera cases. As of September, its only hard assets were HK$28 million of property, equipment and pre-paid leases. Besides a shell into which other assets might be injected later, Tencent and Evergrande aren’t getting much for their money.
So why bother? Both would-be buyers declined to comment, and the transaction would fall far below the threshold at which either would have to disclose it. Investors can only wonder why such a fast-growing company wants to sprinkle even a small amount of their cash into Hong Kong’s murky depths.
