Soho China’s Stock Tumbles 35% After Deal Falls Through, What Will Owner Shiyi Pan Do Now?

Chinese media outlet Dichanyitiao wrote on Monday that Soho China’s share price opened sharply lower and continued to fall throughout the trading day. As of the midday close, the stock had fallen by 34.86% and the share price was HK $2.28 per share. The company’s total market value at that time stood at HK $11.855 billion ($1.524 billion).

This recent drop in the stock price might be attributable to the situation of Soho China and the couple Pan Shiyi and Zhang Xin, the controllers of the company.

On September 10, Soho China announced that the acquisition transaction between Blackstone Group and the company was terminated. It said that Blackstone Group decided not to make an offer for the acquisition of the company’s equity.

In June this year, Soho China announced that Blackstone had issued a comprehensive acquisition offer to acquire a controlling stake in Soho China at a purchase price of HK $5 per share, with a total amount of HK $23.658 billion. If the transaction was completed, Soho China would retain as listed, and the existing controlling shareholder would keep 9% equity.

Now, what will Pan Shiyi and Zhang Xin do now with the company after failing to cash out and the stock value shrinks?

At present, a industry insider has analyzed three possible paths that Pan Shiyi and his wife could take. The first is to privatize the company. Second, make a bulk sale. Third, maintain the business while continuing to look for opportunities for single-building whole sales.

If the couple chose to privatize the company, there are two ways they could go about the process. First, Pan Shiyi and Zhang Xin would act as the main body to buy back shares and complete the privatization. The other way is to find another foreign or domestic investment institution.

At present, the future of these two paths is uncertain. First of all, if Pan Shiyi and Zhang Xin want to buy back shares, they have to raise enough money.

Secondly, the foreign investment institution Blackstone’s acquisition of Soho China has been investigated by antitrust regulators, which limits the possibility of privatization of foreign capital and  stands as a warning in theprivatization of domestic capital.

In 2012, Soho China announced its transformation plan to seize the market opportunity by changing from selling to renting assets. However, due to the weakening of its operations, the rental model did not last long which led to another round of selling entire buildings. Since 2014, the company has continued to shed many of the buildings under its control.

Looking back on Soho China’s development in the past ten years, the above-mentioned insider believes that there is nothing wrong with its transformation strategy in 2012. The problem lies in the weakening of the leasing competitiveness of the project in the market due to its own operation, which makes the subletting strategy fail and subsequently become a clearance plan.

“At present, the path of bulk sales isn’t as worthwhile as it once was, and that may prove to be the last method for Pan.” He believes that “it is easier to continue to operate according to the current model, find other interested investment institutions, and then sell each building separately as a packaged asset. Soho China has sold some assets like this in recent years and reaped considerable benefits.”

At present, Soho China’s core assets are mainly eight commercial projects located in Beijing and Shanghai, with a total area of 797,400 square meters as rentable building space.

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With the rapid economic recovery, the demand for office buildings has begun to grow and the company has seen its occupancy rate of increase in 2021. According to its financial report, as of June 30, 2021, the average occupancy rate of investment properties with stable operations in Soho China has recovered within the last year, rising from from 78% at the end of June last year to 90%.

But the overall financial situation of Soho China looks shaky. According to the company’s interim financial report of 2021, by the end of the period, its total loans amounted to 18.47 billion yuan, of which about 10.12 billion yuan was due within the next year, and about 1.66 billion yuan was due within the next two years. Its net asset-liability ratio was about 43%, and the average borrowing cost was about 4.7%.