SM Investments Sys the money

Sometimes a deal comes along that redefines a sector or a country and completely turns sentiment on its head. Yesterday SM Investments of the Philippines did just that, resolutely confirming that the Philippines is back from international equity no-mans land, with a deal that has broken all the records.

The deal priced at Ps250 a share, bang in the middle of the indicative range of Ps230-Ps270 a share. Selling 115 million shares, the IPO raised Ps28.75 billion ($528 million), making this by far the largest Philippine IPO ever. The previous holder of that title was Petron, whose IPO raised Ps12 billion or $400 million, at then exchange rates. In terms of size, the SM Investments deal will bring in over 6% of the total foreign currency that the country received in overseas remittances last year, the Philippines' biggest export earner.

Of the total amount of the deal sold, 70% or 80.5 million shares went to international investors. The remaining 30% or 34.5 million shares are being sold to domestic investors in a domestic offering starting today. There is a clawback mechanism that could see more of the shares going to international institutions if demand in the Philippines does not come in.

Macquarie is sole books, global co-ordinator and lead manager of the deal. Banco de Oro — a SM Investments subsidiary — is sole books on the domestic deal.

The IPO consisted of 105 million new shares and 10 million existing shares, being sold by the Sy family. Post IPO there will be 530 million shares in the company, with 19.8% of those now in a free float.

In terms of valuation, the IPO values the company at 18.7 times this year's forecast earnings. This is a discount to that of the nearest comparable, the Ayala conglomerate which is trading at 24 times this year's earnings.

The deal was mandated to Macquarie on Christmas Eve 2004 after what were said to be intensive discussions. Initially the family was looking to list just the retail assets, but they decided for the sake of providing liquidity and a large benchmark stock that investors would prefer it if the holding company were listed.

During the two-week road show, the leads took the company to 14 cities around the world, comprising Frankfurt, Paris, Rotterdam, Amsterdam, The Hague, Edinburgh, London, New York, Boston, Chicago, Denver, San Francisco, San Diego and finally Washington DC. Demand was generated from every city and the top ten orders are said to have put in bids of $50 million or more each.

The marketing generated a book that was four times covered with more than $2 billion of demand. It is a sign of SM Invesment's desire to have good investor relations that it decided to price in the middle of the range, what one observer has called a "gracious concession" to leave something on the table for investors. The deal was said to have been covered at the top of the range.

That range was originally set at Ps230-Ps300 in the filing and it appeared as that in the offering documents. However, once pre-marketing started, the range was fixed at Ps230-Ps270 a share. Final allocations saw 154 accounts come in. 35% of the deal went to Asian accounts, 31% to European investors, 31% to US investors and 3% to other offshore accounts.

The success of this deal in generating such huge investor interest, coming from a country that has been a desert for international equity offerings, is due to the nature of SM Investments itself. The company is a conglomerate involved in retail, shopping malls, real estate, leisure and banking, and is a dominant player in each of those sectors.

The company's influence and size is extraordinary. Indeed 50% of every peso spent in shops in the Philippines goes through SM Investments. The company also as the largest land bank in the Philippines, although Ayala has the most valuable land bank. Even so, just one of its lots, Hacienda Looc is roughly 10% of the size of the Philippines. The company also owns 50% of the country's shopping malls.

In financial services, its Banco de Oro subsidiary has the lowest NPL rate and highest earnings growth of any bank. The other sub, China Bank, has the highest ROE.

The revenue and earnings of the company also mainly come from the unlisted parts of the business, which was a concern for investors who did not want to see this listing competing with its listed subs and cannibalizing their business in some way. 74% of SM Investment's revenues come from the unlisted assets and more than 50% of the assets and net income are derived from the non-public parts of the conglomerate. The proceeds generated from the deal will mostly go to these unlisted parts, with 76% going to the real estate and leisure parts of the company, with 24% going to reduce the company's debt. The company will now reduce its gearing level to below 50%.

"This is a once in a generation deal from a once in a lifetime client," says Stephen CuUnjieng, managing director and in charge of the Philippines at Macquarie in Manila. "We are honoured to have represented them."

For Macquarie, this is the third equity deal it has done in the Philppines since November last year. The only other international deal was the $97 million IPO of Manila Water done last week, by UBS.

More deals are said to be in the pipeline from the Philippines and the intense marketing done with the SM Investments deal will undoubtedly help them. For SM Investments to do well, the Philippine economy has to do well. And investors clearly have a good view of the prospects for SM Investments.

The company will start trading on March 22nd.