HKEx turns down PCCW business trust

It’s the moment so many tycoons have been waiting for. From the WSJ:

Hong Kong’s dominant fixed-line operator, PCCW Ltd., said Wednesday the Hong Kong bourse rejected its plan to carve out its telecommunications business in the form of a listed business trust, the latest blow to Richard Li’s attempts to cash out of a deeply indebted investment that is battling fierce competition.

PCCW’s failure has a wider significance for Hong Kong. In January Hutchinson Whampoa snubbed Hong Kong (HKEx) for Singapore (SGX) because the latter offers a business trust structure. This caused some exitable politicians in LegCo to accuse the Securities and Futures Commission (SFC) and HKEx of “losing” the listing, which was the largest IPO of the year to date. On the other hand, corporate governance activists say the business trust is prejudiced against unit-holders (the trust equivalent of a shareholders) in favor of the parent company, and HKEx would be lowering its standards if it accepted them.

PCCW was supposed to be HKEx’s chance at redemption. So what happened?

First, this isn’t  necessarily HKEx/SFC poo-pooing the idea of business trusts. Hutchinson Whampoa’s spin-off of its ports operation was at least plausible, but everyone knew that PCCW’s claim that it was “spinning off” its telecoms unit is a bit like Google saying that it’s spinning off its search engine business. It strains credibility, which possibly forced the SFC’s hands. Besides, they can still change their minds about business trusts in future.

Second, all eyes will now be on PCCW and its dealing with the Singapore exchange. If SGX accepts PCCW’s case that it is qualified for the Singapore Business Trust structure, it will be easy to frame the move as a race to the corporate-governance bottom. 

Third, I’m not sure how much it all actually matters. Corporate governance activists make good points that business trusts rig the assets in favor of the minority holdings of parent companies, which is why Hong Kong tycoons show a special prediliction for them. But if they’re concerned, market agents always have the option of just not buying the unit listings.

In reality, some shareholder activists will choose to forgo purchases of units in business trusts. On the other extreme, hedge fund quant traders won’t really care. The aggregate effect is that the share price is discounted slightly from what it would be without the governance concerns; anecdotal evidence – including HPH Trust’s IPO – suggests that business trusts tend to underperform when they IPO.

I’ve spoken with a few corporate governance activists about the phenomenon and I haven’t really recieved cogent answers. But I think their hearts are in the right place, so if anyone can explain a compelling reason why the market shouldn’t be left to its devices on this one, I’m all ears.