Sterlite, which is a leading producer of copper, zinc and aluminium in its home market, sold 130.44 million ADS at a price of $13.44 each. Adjusted for the exchange rate, this is equal to the Rs544.40 close of SterliteÆs shares in Mumbai on Monday. The greenshoe was increased proportionally to 19.56 million shares from 18.25 million in order to remain at 15%.
Each ADS accounts for one common share and the shares backing this deal were 100% primary. Citi, Merrill Lynch and Morgan Stanley were joint bookrunners for the offering.
The tight pricing, which may result in total proceeds of $2.02 billion if the greenshoe is fully exercised, was possible after strong demand from investors, including a handful of $300 million to $400 million orders that came in over the final couple of days.
According to sources, over 150 accounts came into the book and the deal was more than three times covered after taking out the 11.5 million shares that were set aside for Japanese retail investors through a Public Offer Without Listing and the 20% of the deal that went to US retail investors.
In addition, the POWL tranche, which was arranged by Nomura Singapore, was said to have attracted more than $500 million of demand.
Initially it didnÆt look that promising, however, and at one point at the beginning of the nine-day roadshow, SterliteÆs share price fell below the Rs531.84 ($13.11) floor price set by the Securities and Exchange Board in India, causing concern that the deal might have to be pulled. The floor price is set to ensure the offering price doesnÆt go below the average of the weekly high and low closing prices for the six months and two weeks ending one month before shareholders approve the share sale, which in the case of Sterlite happened on December 11, 2006.
Having secured that approval, Sterlite filed for a US offering, but then saw the share price drop below the floor and the deal was never launched. The share sale has acted as an overhang on the share price ever since, resulting in a mere 0.2% increase for the stock so far this year. That compares with a 30% gain for London-listed Vedanta Resources, which owns 76% of the company. The fact that the sale has now been completed should help the stock to move higher, observers say.
Indeed, the share price gained 2.8% in Mumbai yesterday after the deal pricing was announced to a close of Rs559.90. The ADSs, which started trading on the New York Stock Exchange rose 9.4% to $14.70.
Sources say investors were interested in the company because of its strong position in the fast growing Indian market, where demand for commodities is expected to continue to grow significantly. Industry data for fiscal 2006 show it had a 43% share of the copper smelter market, a 73% market share of zinc production and 19% of aluminium production. The company is also a low-cost producer, thanks to its high quality assets and resources.
ôItÆs a combination of scale, diversification, liquidity and a relatively cheap valuation,ö says one source, summing up the interest. ôSterlite is a way to play IndiaÆs economic growth story through commodities.ö
Between fiscal 2004 and 2006, the company saw net sales grow at a compound annual growth rate of 51.5% and in the six months to September 2006 sales jumped 158% from a year earlier to Rs111.33 billion ($2.4 billion) due to a combination of capacity expansions and an increase in commodity prices to historical highs. In the same six-month period, the net profit from continuing operations gained 378% to Rs22.0 billion ($478 million).
Based on consensus estimates, Sterlite currently trades at a 2008 price-to-earnings multiple of about seven, which compares with nine times for Vedanta and an average 10.4 times for a broader group of sector comparables.
Like most other ADRs by Asian companies, SterliteÆs US-listed shares can also be expected to trade at a premium to its shares in India (usually due to the supply and demand situation), so the pricing at par presented a good opportunity to buy the stock. This also attracted some interest from momentum funds.
Otherwise, long-only funds, including existing shareholders of Vedanta, made up a large portion of the book, one source say. Some commodity specialists also came into the deal, although most of the orders came from global general funds.
Some investors may have hesitated over the deal because of the difficulty in hedging the exposure. They may have also been reluctant to invest in all three of SterliteÆs metals.
Sterlite will use the money from this sale primarily to exercise a call option to buy the governmentÆs remaining 29.5% stake in the companyÆs zinc subsidiary, Hindustan Zinc Ltd. The price for such an acquisition will be equal to the fair market value, as determined by an independent appraiser, but based on HZLÆs current share price it could be around $2.3 billion. Sterlite currently holds about 64% of HZL.
Some of it may also go towards a planned move into commercial power generation, where the company is hoping to leverage its experience of operating and managing seven captive power plants that feed electricity to its metals production facilities. The company plans to invest about $1.9 billion over the next four years to build the first phase (2,400MW) of a thermal coal-based power facility. About 70% of this power project is expected to be funded by external debt, while the equity contribution will be spread out over four years.
The company is also looking to reduce its outstanding debt by about $150 million.
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