Macau Legend raises $283 million from downsized IPO

Macau Legend raises $283 million from downsized IPO
Macau

Hotel and casino operator Macau Legend Development has raised HK$2.2 billion ($283 million) from its downsized initial public offering after fixing the price slightly above the bottom of the range at HK$2.35.

The price, which was confirmed by sources, came as a bit of a surprise given that the company had reduced the number of shares on offer by 54% after failing to attract sufficient demand during the initial bookbuilding period.

In order not to have to re-do the retail offering, the price range was kept unchanged when the smaller deal was re-launched on June 26, however, and it was generally assumed that the company would price at the bottom of the range. Especially since the Hang Seng Index has fallen 7.7% since the price range was first set in connection with the start of the management road show on June 7.

SJM Holdings, which is viewed as the closest comparable, has lost 10.6% during the same period. Macau Legend operates three casinos in Macau under a service agreement with Stanley Ho-controlled SJM.

One source said there was some additional incremental demand from institutional investors after the re-launch, but the key reason for the pricing seems to have been a face issue. The company simply didn’t want to price at the bottom.

The shares were offered at a price between HK$2.30 and HK$2.98, so the final price of HK$2.35 was only marginally above the low point.

The company was initially trying to raise between $607 million to $787 million, but amid the sharp sell-off in equity markets across the region during the bookbuilding, the demand fell short. However, rather than call it a day and pull the deal as Hopewell Hong Kong Properties and Mando China had done when they ended up in a similar situation in previous weeks, Macau Legend chose to make use of the demand it had and restructure the transaction.

The company needs money to fund its HK$6.8 billion redevelopment of the Fisherman’s Wharf area in Macau, and while it doesn’t need it all at once, it clearly felt that it would be beneficial to raise some funds now and at the same time put the platform in place so that it can return to the market more easily as and when the conditions improve.

So, it cut the size to 15% of the enlarged share capital from the 29% that it had initially tried to raise and returned to the market with the reduced offer five days after the original bookbuilding ended.

The re-launched deal was open for three days, during which institutional investors technically had to resubmit their orders. Retail investors who had subscribed to the original deal had to confirm that they wanted to stay in, but the retail offering didn’t actually reopen and the bookrunners didn’t accept any new subscriptions. The order books closed for the second time last Friday.

Dynam Japan Holdings, an operator of pachinko game halls in Japan, which had committed to support the initial deal as a cornerstone, stayed in and kept its investment amount unchanged at $35 million.

The final demand included some international institutions and one source said there were orders from long-only investors both in Europe and the US, as well as Asia. Some hedge funds and high-net-worth individuals were also said to have submitted orders. However, a large portion of the demand came from investors close to the Macau-based company and its controlling shareholders.

The re-launched deal came with a greenshoe of all secondary shares, but according to the source, those shares haven’t been allocated. That means there will be no shares available to help stabilise the share price when the stock starts trading tomorrow.

The base deal comprised 934.8 million new shares, which was 54% fewer than the 2.05 billion that it was initially offering.

The initial retail offering (10% of the original deal size) was 51.7% subscribed and after the re-confirmation of orders, about one-third of that demand still remained, one source said. That means retail investors committed only about $10.5 million to the deal and as a result the retail tranche was reduced to 3.7% of the total deal. The remaining 96.3% went to institutional investors.

The price range translated into an enterprise value-to-Ebitda multiple of between 3.8 and 5.1 for 2017, based on the average forecasts by the syndicate banks. The deal was marketed on a 2017 basis since that is the first year when all its new hotels and casinos should be up and running.

On a 2015 basis, the price range valued Macau Legend at between seven and 9.4 times and by the time of the re-launch, that looked pricy compared to SJM, which was trading at a 2015 multiple of 7.7 times. However, Macau Legend is expected to see significantly greater growth than SJM between 2015 and 2017 and on that basis the valuation was still attractive, one source argued.

CLSA was the sole sponsor for the IPO as well as a joint global coordinator together with Citic Securities. Credit Suisse was joining them as a bookrunner.

New Century Reit
Whether it was influenced by Macau Legend or had been plotting a similar strategy all along is unclear, but the day after the Macau company re-launched its IPO, New Century Real Estate Investment Trust decided to follow suit and re-launch a smaller offering after it too failed to attract enough demand for its original deal.

The hotel-focused Reit, which is backed by Carlyle, had initially tried to raise between HK$1.64 billion and HK$1.97 billion ($212 million to $254 million) by selling 60.9% of the trust to public investors in the form of 469.9 million new units.

After the restructuring, this was cut sharply to 193 million units, representing just 25% of the trust. It too kept the price range unchanged at HK$3.50 to HK$4.20, which indicated a new deal size of between $87 million and $104 million.

The price range translates into a clean yield of 6.50% to 7.80% for 2013, although the actual yield is a bit higher at 7.63% to 9.15% as Carlyle and the other significant unitholder, Huge Harvest, will waive their dividend entitlements for the next two years.

The retail offering has been adjusted to 10% of the reduced size and the re-launched deal also comes with a 15% greenshoe.

According to a source, the expectation is that the greenshoe won’t be allocated, however, and that the price will be fixed at the bottom.

The institutional portion of the deal was re-opened for just one day — last Friday — while the retail offering re-opened on Saturday and will close at 5pm Hong Kong time today. Contrary to Macau Legend, retail investors can submit new orders during this time.

There was no information available on the coverage ratio for the initial retail offering, but according to sources, it was undersubscribed.

The institutional demand came primarily out of China and included companies, insurers and other asset managers, as well as high-net-worth individuals who were attracted by the high yield. According to one source, the Reit has also secured one big Chinese strategic investor.

New Century Reit is sponsored by the New Century Group, which is the largest domestic, private-sector, star-rated hotel group in China. At the time of listing, it will have five hotels in its portfolio.

Carlyle first invested in the new Century Group in 2007. Prior to the IPO it swapped its interest in the group for an ownership in the hotels that have subsequently been sold to the Reit. Carlyle and the other hotel owners were paid both in cash and Reit units and after the listing, the private equity firm will own about 30% of New Century Reit.

The final price will be set after the retail offering closes today and the trading debut has been rescheduled to July 10.

Morgan Stanley and Standard Chartered are global coordinators and bookrunners, while BOC International, Bocom International, CCB International, Galaxy Securities and Haitong are also joint bookrunners.

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