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Take Hong Kong protests, add a dash of Brexit and then stir in the death of brick-and-mortar shopping. It’s hardly surprising that a savvy investor would want to bail from its stake in AS Watson Group, a retailer based in the former British colony with a big UK footprint.
These latest geopolitical flash points have been cited for Temasek Holdings Pte’s decision to table the sale of its $3 billion interest in AS Watson, Bloomberg reporters Manuel Baigorri, Joyce Koh and Vinicy Chan wrote. The company has a sprawling operation in Hong Kong that includes the ubiquitous Watsons drugstore chain, supermarkets and electronics stores. Pro-democracy protests in the city, which have choked main commercial areas over the past several weekends, have become a problem. The city’s retail sales could plunge to a decade low in August, after an 11.4% drop in July, Bloomberg Intelligence says. Tourist arrivals in July fell 4.8% from a year earlier, the Immigration Department said.
Meanwhile, AS Watson owns Superdrug, a pharmacy and beauty retailer with hundreds of stores in the UK As Brexit uncertainty rocks the pound, revenue coming in looks weaker for a parent that reports earnings in Hong Kong dollars (which trace the greenback).
But offloading AS Watson would be a hard sell even without the background noise of these political dramas. Temasek forked out HK$44 billion in 2014 to buy a 25% stake in the retailer from Hong Kong billionaire Li Ka-shing’s CK Hutchison Holdings Ltd., which remains the controlling shareholder. The global ports-to-telecom conglomerate said it planned to list the business within three years. In a world where the likes of Amazon.com Inc. and Alibaba Group Holding Ltd.’s Taobao have decimated traditional drugstores, finding a willing buyer has been an uphill task.
The Singapore investment firm’s asking price also looks quite rich. The $3 billion tag for a 10% stake amounts to a valuation of $7.5 billion for 25% currently owned by Temasek. In March, Citigroup Inc. analysts said the target price implies a valuation of 16.5 times forward Ebitda — well above 9 times the
broker had assigned to AS Watson.
During the first half of the year, excluding a one-time HK$633 million gain from its mainland venture, Watson’s retail earnings before interest, tax and depreciation rose 6% in local currencies, driven by its health and beauty-product sales in Asia. Its Chinese operations also saw a turnaround, with same-store sales up 2.2% after declining 1.6% in 2018.
—Bloomberg