Temasek Holdings sold an S$2.01 billion ($1.187 billion) stake in Singapore Telecommunications after New York's close Tuesday. The deal comprised an S$764 million ($450.5 million) placement and an S$1.25 billion ($736.6 million) exchangeable, with an S$203.8 million ($120 million) greenshoe.
On full exercise of the shoe, the government will see its stake in the telecommunications carrier drop 5.61% from 67.1% to 61.49%. As a result of the placement, which represented a 2.12% stake, SingTel will see its freefloat expand from 32.9% to 35.02%. This means it just scrapes into the next MSCI bucket (35% to 40%) and should attract new institutional interest from its increased weighting.
The Singapore government has committed to divest its SingTel stake as part of a free trade agreement with the US but is now locked up for six months. The divestment programme will undoubtedly create a huge overhang for SingTel's share price, but many believe the move will be long-term positive for the stock and an exchange, which needs to attract greater liquidity to compete with its larger North Asian rivals.
During 2003, Singapore government related entities received continual criticism for their handling of equity transactions. A succession of deals were mandated on the basis competitive bid, attracting ludicrously aggressive terms from investment banks desperate to win business. Many wondered how the government thought it could sustain a divestment programme if it continued to pay little heed to aftermarket performance and investor loyalty.
But as officials gain more experience, they have learnt to modify the process and achieve a better balance between issuer and investor expectations. This time round, Temasek appears to have invited a much smaller number of banks to bid and while it did mandate Merrill Lynch on the basis of the most aggressive terms, it allowed them to be modified after taking a final, careful look at market conditions.
While there is still some confusion over exactly what happened, specialists say that in the end the mandate came down to two bookrunners, Deutsche Bank and Merrill Lynch. However, Deutsche was never formally mandated and dropped out after the deal was re-configured just ahead of launch.
Merrill is said to have won the deal on the basis of a 50/50 split between the equity and exchangeable component and a tighter discount than the one finally achieved. This fitted well with Temasek's strategy to increase the freefloat as soon as possible and into the next MSCI bracket.
But with NOL still casting a long shadow over the market, officials decided not to risk putting too much pressure on the stock by overloading the market with paper. The final split between the placement and exchangeable was set at a more reasonable 30/70 and all market participants say terms were fair and could not have been pushed much further without compromising the success of the whole deal.
The placement comprised 391.96 million shares, marketed at a 3% to 5% discount to the stock's S$2.05 close. Pricing came at S$1.95, a 4.9% discount. The placement represented roughly 30 trading days.
The exchangeable had a five-year maturity with put and call options in year two. The zero coupon deal was priced at par, with a two-year put price of 99.80% and redemption at 99.50% to yield minus 0.10%. The call option has a 120% hurdle.
The conversion premium was marketed on a 25% to 35% range and priced at 29%.
Underlying assumptions encompass a bond floor of 96%, implied volatility of 25% and theoretical value of 98%. This is based on a credit spread of 15bp, 75bp borrow cost, 6.3% dividend yield and historic volatility of 22%.
Like previous equity linked deals from Singapore, SingTel has been priced through historic volatility, but as it is a low vol stock, specialists say it is less surprising to see rich theoretical value below issue price.
Non lead bankers comment that the combination of Temasek's triple-A credit, a defensive two-year structure, plenty of available stock borrow (S$650 million) and a rock solid bond floor provided a winning combination. The exchangeable consequently closed its first day trading at 100.125% to 100.375%, while the stock price fell to close at the placement price.
By comparison, the two exchangeables for STE and CapitaLand had far more aggressive structures. They both had much longer maturities (seven put five), high conversion premiums in the 40% plus range, aggressive credit spread assumptions and in the case of STE, pricing significantly through historic volatility (33% implied versus 24% historic).
Analysts have reacted to the divestment with a mixture of underweight to neutral ratings. Some say the stock still has near-term potential because of its strong offshore operations. While domestic revenues continue to decline, Optus continues to perform (in part thanks to a strong Australian dollar) and SingTel is successfully expanding overseas. International assets, for example, grew 78.3% year-on-year to September 2003.
