ESR Group: Possible Privatization by Consortium of Investors; Shares Undervalued

Narrow-moat ESR Group has received a privatization proposal from a consortium of investors composed of Starwood Capital, Sixth Street Partners, and SSW Partners. Under the proposal, shareholders can either choose to receive cash consideration or shares in the privatized company. ESR Group has formed an independent board committee and retained Citigroup Global Markets Asia Limited as a financial adviser to help evaluate the proposal. The independent board committee excludes the group’s founders, Stuart Gibson, Charles de Portes, and Jinchu Shen, as well as Jeffrey Perlman of Warburg Pincus (key shareholder of ESR Group), as they are in discussion with the consortium and believe the proposal is in the best interest of ESR Group’s shareholders. No offer price has been announced so far, but we think the price will need to be comparable with our fair value estimate of HKD 15.80 per share to entice shareholder acceptance. Currently, the shares are trading at a 37% discount to our valuation.