Blackstone Spies a Gem Amid the Virus Rubble

(Bloomberg Opinion) -- The world’s biggest private equity fund is making its boldest bet on China. Blackstone Group Inc.’s planned $4 billion offer for Hong Kong-listed property company Soho China Ltd. is cheap enough to ensure that the deal is a winner, even amid an economy that’s been ravaged by attempts to contain the coronavirus.

Blackstone is bidding HK$6 per share to take the owner of office buildings in Beijing and Shanghai private, according to a Reuters report Tuesday. That’s more than double the stock’s HK$2.98 closing price Monday. Soho China shares surged 38% after the report, before being halted from trading at the company’s request pending an announcement under the takeovers code. Its HK$21.3 billion ($2.74 billion) market capitalization on suspension is still a third below Blackstone’s offer.

At first glance, the price appears rich for a developer that has passed its glory days. Founded in the 1990s by husband-and-wife team Pan Shiyi and wife Zhang Xin, the company switched strategy in 2012 from developing and selling projects to becoming an office landlord focused on recurrent income streams. The stock has never regained its pre-global financial crisis high of HK$11.92, reached shortly after listing in 2007, and has traded on average at less than a quarter of that level over the past year.

There’s value in its assets, though. Even after Tuesday’s surge, Soho China is trading at only 0.54 times forward book value — far lower than when it began its shift to a build-and-hold model eight years ago. Prestige developments include the Bund SOHO in Shanghai’s city center and the futuristic Wangjing SOHO in Beijing, designed by Zaha Hadid, the first woman to receive the Pritzker Architecture Prize.

The $4 billion price tag, which translates to 0.78 times forward book, is a bargain, according to analysts at Bloomberg Intelligence. In October, Soho China was considering selling a majority of its commercial property holdings for as much as $8 billion, Bloomberg News reported, citing people familiar with the matter. Blackstone will also assume Soho China’s debt, which stood at the equivalent of $4.7 billion at the end of June, Reuters reported.

Granted, the office market has been struggling. Vacancy rates in 17 major cities were already at their highest levels since at least 2008 in the third quarter, according to a report from CBRE Group Inc. Shanghai’s vacancy rate was 19.5% while Beijing’s was 10.9%, the report said. Measures to contain the coronavirus, which shut down as much as two-thirds of the economy in February, have damaged the outlook for growth, already damped by the trade war with the U.S. last year.

Soho China hasn’t escaped trouble. First-half profit fell almost half. Meanwhile, a push into office sharing has failed to impress investors, especially after the fiasco of WeWork’s scrapped U.S. IPO last year.

Blackstone will be betting that the company’s premium developments prove relatively immune to the declining rents and increased supply afflicting the Beijing and Shanghai commercial markets. Average office occupancy at Soho China’s buildings was 94% in the first half of 2019, though that was down from 97% a year earlier, according to analysts at HSBC Holdings Plc.

New York-based Blackstone, which raised $7.1 billion in its largest ever Asian property fund late last year, has a record of making big wagers at times of turmoil that turn out well. The company bought Hilton Worldwide Holdings Inc. for $26 billion in 2007, just before the financial crisis, and sold it for a $14 billion profit 11 years later. Don’t bet against it repeating the trick.

To contact the author of this story: Nisha Gopalan at ngopalan3@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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