RPT-BREAKINGVIEWS-The Li’s brinkmanship with Beijing will be messy

By Ka Sing Chan

HONG KONG, March 31 (Reuters Breakingviews) - China senses a betrayal by the Li family's plans to shed global assets as part of their effort to deal their way out of a value trap. Beijing's anger is evident through a series of critical editorials in the media against the Hong Kong family's flagship conglomerate, $21 billion CK Hutchison 0001.HK. But that brinkmanship between the two sides could easily spill into an active and messy conflict.

Shares of CK Hutchison fell as much as 5% on Monday following a Reuters report saying that the company would delay the Panama part of a proposed $23 billion deal to sell its overseas ports business to a BlackRock-led consortium. The group's flagship has since erased half the 33% stock market gain it made on announcing the deal last month. But things could get much worse.

The Li family have halved CK Hutchison's exposure to the mainland since a 2015 restructuring that incorporated it in the Cayman Islands but the company still held about $14 billion worth of assets in China, or 9% of the total, as of December. Meanwhile, sister firm, the $14 billion CK Asset 1113.HK, derives up to 43% of its earnings from Hong Kong and the mainland. These remaining interlocking interests in retail, utilities and property provide Beijing with ample pressure points.

Approvals for a series of deals could stall, for example. Beijing has already pledged an antitrust review of the ports sale. CK Hutchison is eyeing a potential spinoff of its global telecommunication assets in London, Reuters reported on Friday, citing sources. That deal could be worth $19 billion. The Hong Kong initial public offering of FWD, a pan-Asian insurer worth some $9 billion, controlled by Li’s younger son, requires Beijing's greenlight too.

Elsewhere, the Hong Kong government can look into anticompetition issues in the electricity or property sector. That would ostensibly tackle the issue that has vexed locals for decades: Yet such a move will hit not just the Li's but also rival companies and tycoons in Beijing’s good books, such as $10 billion Hongkong Land HKLD.SI, majority-owned by a subsidiary of Jardine Matheson JARD.SI. It also would disrupt business for state companies: China State Construction Engineering Corp 601668.SS, for instance, remains one of CK Asset's top suppliers.

If Beijing ramps up pressure on the Lis, it will undercut its message that it is open for business but China has shown that it's willing to endure reputational setbacks to keep its business leaders on a tight leash. This was evident in its assault on Jack Ma and a wider crackdown on China's tech sector. The rest of the Li's journey away from Hong Kong will be stormy.

CONTEXT NEWS

CK Hutchison will not sign a deal this week to sell its two port operations near the Panama Canal to a BlackRock-led consortium, Reuters reported on March 28, citing two people with direct knowledge of the matter. China’s market regulator has said earlier it will carry out an antitrust review on the port deal.

Separately, CK Hutchison has started preparations to spin off its global telecommunication assets in London, Reuters reported on March 28, citing two people with knowledge of the matter. The business could be valued between up to 15 billion pounds ($19 billion), one of the people said.

In response to the report, the company issued a statement on March 31 saying it had not made any decision to proceed with any transaction related to its global telecom business.