Shimao Services Scraps Deal to Buy Mainland Affiliate After Uproar

A connected-party deal that raised eyebrows when it was announced by Shimao Services a year ago has been terminated, with the company telling the Hong Kong stock exchange last week that it would no longer acquire a mainland-based property management unit of Shimao Group for RMB 1.65 billion ($240 million).

The scrapped transaction, which was valued at nearly $260 million when disclosed on 13 December 2021, would have transferred the property management duties for 70 projects in 24 cities to HKEX-listed Shimao Services and injected liquidity into the struggling parent group, a former top-10 developer in China.

In a filing with the HKEX on Friday afternoon, Shimao Services cited opposition by independent shareholders and a change in market conditions as factors in the decision to break off the deal.

“The board does not consider the termination of the acquisition will have any material adverse effect on the existing business, operation and financial position of the company,” said Shimao Services chairman Jason Hui, the son of Shimao Group founder Xu Rongmao (who also goes by his Cantonese name, Hui Wing Mau).

Delayed Then Ditched

The deal’s announcement last December had met with criticism from JPMorgan Chase analysts, who termed the transaction a “corporate governance red flag” and questioned whether Shimao was transferring the cash “from property manager to developer level”.

The analysts said investors were increasingly worried about publicly listed property managers being used as a financial tool by developers sharing the same owners, Bloomberg reported at the time.

Just 11 days after revealing the acquisition plan, Shimao Services released a statement acknowledging “a large number of feedbacks from independent shareholders” and vowing a six-month moratorium on major asset transactions between the company and the parent group.

A circular containing details of the proposed acquisition and an opinion from independent financial advisors was meant to be issued in January, but the document’s release was delayed four times throughout 2022 until the deal was ultimately called off.

Group Dogged by Defaults

Shanghai-based Shimao, whose landmark projects included five-star hotels in the megacity, was once considered largely immune to the crisis that has engulfed bigger peers like China Evergrande Group and Sunac China Holdings. That was before Shimao suffered its first-ever default in July when it missed a payment on a $1 billion offshore bond.

The developer appointed Hong Kong-based Admiralty Harbour Capital as its financial advisor and US law firm Sidley Austin as its legal advisor to begin work on a debt restructuring plan. A third set of advisors is carrying out an “independent investigation” into accounting issues raised by Shimao’s former auditor, PricewaterhouseCoopers.

Most recently, units of Shimao Group and China SCE Group Holdings missed payments on RMB 1.6 billion ($225 million) worth of trust borrowings, as reported by Bloomberg in October.

Property management offshoot Shimao Services raised more than $1 billion from a Hong Kong IPO in October 2020, but the company’s share price is down more than 82 percent since then.