THE MYSTERY OF 551 REVEALED
Why do companies accept Tom Group shares at a big premium to market rate?
By Jasper Moiseiwitsch

Tom Group, a greater China publishing and advertising company, broke a tradition in July: it signed an MOU to acquire one-third of the Hong Kong broadcaster ATV with an offer of shares valued at HK$3.33 (US$0.43). The deal was aborted, but Tom watchers were still intrigued that the company would part with shares for that price. This reflected a premium to the closing price, true, but it was a large discount to the way it usually values its shares. Hong Kong-based Tom has financed 19 acquisitions over the past two years by exchanging its stock at a set rate of HK$5.51 (see box). Its share price has been below that figure all the while.

Theories abound on why companies would accept Tom shares at a premium. One rumor goes that the Li Ka-shing vehicles, Cheung Kong and Hutchison, have a standing offer to lend Tom money, debt that would be convertible into Tom shares at HK$5.51 apiece. This facility, said to be HK$850 million (US$109 million), disinclines management to sell shares below HK$5.51, as it would undermine the Cheung Kong and Hutchison positions. Another theory is that the HK$5.51 figure is more an indicative price that makes for a nice headline figure, but the newly acquired companies often sell their Tom shares for less.

Tom management was not available for comment, but spokesperson Rachel Chan offers an explanation. She says the firm has long-term faith in its ability to achieve a market valuation of HK$5.51. By valuing its shares at this price, the company obliges acquired companies to share this faith, and to hold their investments.

Portal Combat

If Tom can persuade companies to take on its shares at above market value, then good for them. They are clearly operating in shareholders' best interests. But none of this explains why investors would accept Tom shares at such a premium.

Tom began, most remember, at its HK$760 million IPO. The listing was 669 times oversubscribed and marked the most inflated point of Asia's short-lived internet bubble. Tom's listing business plan outlined a pure internet play: its recently launched 'mega-portal' would deliver content and e-commerce to the global Chinese-speaking community. But after a net loss of HK$194 million (US$25 million) in the half year following listing, the company shifted gears to become a 'cross-media' enterprise, mixing magazine, book and billboard platforms. The move coincided with the appointment of former Goldman Sachs banker Sing Wang as CEO in July 2000.

Under Wang's guidance, Tom has blossomed into a solid company with real revenues and assets. It's an impressive feat given that Tom was built from so little. Its main listing asset, the Tom.com portal, was soft-launched mere weeks before the IPO, and has since little to contribute in terms of revenue or business development. But Wang has leveraged these assets into a company controlling big parts of the Taiwanese magazine industry and the mainland market for outdoor media (billboards, bus shelter ads, etc). These off-line properties, largely acquired with '551' shares, contribute the bulk (86 percent) of Tom's revenue, approaching HK$1 billion a year.

String Theory

In a rare interview given in December 2000, the Buddha-esque Wang, whose passive, friendly face masks Zen-like complexities, outlined Tom's greatest asset: its share capital. He explained that there was a long line of mainland companies that, for lack of regulatory approval or expertise, could not execute a listing. By merging with Tom via a share swap, they managed a de facto GEM listing through Tom. Wang need not add that Tom shares carried an intrinsic other value to investors: its association with Li Ka-shing. The name has long been identified with outstanding shareholder returns - investors are willing to take a lot on faith as far as his companies are concerned.

As such, the Taiwanese publisher PC Home (Tom bought 49 percent of the company in May 2001) spoke optimistically of finding a spin-off listing on the Hong Kong stock exchange, undoubtedly with Tom's careful guidance and connections. In deals with other Taiwan publishers, Tom pledged IPO shares in a planned listing of its print-media assets. Tom covered as much as 25 percent of the purchase price of these firms with these, as yet unrealized, shares.

In this scenario, Tom would not be valued in terms of traditional benchmarks such as asset value or earnings, but in terms of ability to raise money for its partnered companies - either through a spin-off listing or by merging into Tom's own GEM listing. This all brings us back to the question: how much are Tom shares worth?

It is an impossible, 'how long is a piece of string' type question. Acquired companies are gladly accepting Tom at HK$5.51 per share. But its market value has gyrated from a listing price of HK$1.78, to a high of HK$15.35 in March 2000, then down to the HK$2.00 level, where it spent most of 2001.

It is curious that Tom bumped along for so long at HK$2.00, never dipping below its IPO price. So long as it stayed above this level, management could claim that Tom is the only GEM internet venture to stay above listing price. While the fact didn't add to Li Ka-shing's credibility, it at least didn't hurt it. This happy situation invites questions. When Liana Yung, a Hong Kong-based analyst at ABN Amro, is asked whether she believes an interested party actively offered share price support for Tom during this critical period she answers: "Oh yeah, I think so."

Tom will neither confirm nor deny such speculation, saying only that it will not comment on market rumors. As it is, Tom's share price has soared in the past 12 months, rising at times to challenge the magical HK$5.51 figure. It is also a highly liquid stock - albeit, retail driven - which is a large part of the reason its acquired companies have been so willing to accept Tom scrip.

A Leg Up

In the recently scotched ATV deal, Tom looked to add a new leg to its empire: TV. It bid for the 32.75 percent of the Hong Kong broadcaster ATV held by Lai Sun Development, a Hong Kong property and garment concern. The deal was entirely financed with Tom shares: the company proposed to give 87.2 million of its shares to Lai Sun. These are indicatively priced at HK$3.33, for a total transaction value of HK$290.4 million.

Lai Sun director Keith Wu explains that half of its ATV stake is collateralized with bondholders. If it sold to Tom, bondholders would be swapping this ATV collateral with Tom shares. This fact has brought much more rigor into the transaction than perhaps has been seen in previous Tom deals, which is why Tom accepted a HK$3.33 valuation for its shares, he says. .

What next?

Tom Group says the ATV deal did not go through because it was not given the chance to do "meaningful" due diligence on the transaction. Others speculate that it was because Tom could not guarantee the purchase of another 46 percent stake in ATV held by Phoenix Satellite chairman Liu Changle. Li Ka-shing has a long history of taking controlling stakes in strategic assets, and few thought Li would make an exception with ATV.

But Tom watchers tend not to question whether the company can complete its deals but whether it can execute its business plans. One Hong Kong-based media analyst complains that the continuous news flow on Tom transactions - where the firm has been outstanding - deflects attention from its business execution - where it has only been fair.

In any case, the ATV deal could have become a headache. The perennial number two to rival TVB has made money in only three of its 29 years. Turning ATV around would require investment and Tom has limited cash reserves: about HK$260 million, notwithstanding its untapped credit facility. Previous acquisitions show frugal Tom looking for cost-cutting and an immediate dividend stream from its investments - the flow of cash should be in, not out.

Kristian Jhamb, a Hong Kong-based media analyst with JPMorgan, gives Tom a qualified thumbs up. He cites company success in turning around the Taiwanese publishing businesses, where profits for PC Home and Cite rose from negative 4 percent in 2000 to 9 percent in 2001. But Jhamb's models for the company use old-economy-type metrics that basically add up the sum of Tom's many disparate parts. He has yet to buy into Tom-talk of achieving 'synergy' with a cross-media platform. He adds that only 4 percent of the firm's total sales come via bundled ad deals with two or more Tom media properties.

But nobody should underestimate Tom. It is clearly punching above its weight in terms of deal volume and execution. The management, well reviewed for its intelligence and sincerity in extracting value out of Tom, has done a terrific job of building this firm up. More 551 deals, and a profitable company, should follow.

Jasper Moiseiwitsch is a contributing editor at CFO Asia based in Hong Kong.