WH Group is restructuring its initial public offering in Hong Kong after a difference of opinion between issuer and investors about where the shares should price. The Chinese pork producer unveiled a slimmed down deal of $1.34 billion to $1.88 billion, excluding any potential greenshoe allotment.
The group halved the primary share deal to 10% of its issued share capital, or 1.3 billion shares, and scrapped a secondary share tranche altogether. The price range remains the same at HK$8 to HK$11.25 per share, equal to about 13.9 times to 19.3 times forward earnings.
Final pricing is set for April 29.
The deal restructuring is unsurprising given tensions between price-sensitive institutional investors and a group of existing shareholders keen to maximise the value of their holdings.
There was never any problem covering the order book, which garnered $4 billion of demand from institutions and $2 billion from friends and family on the Chinese mainland by day one of the institutional bookbuild. The problem was that demand only came at the bottom end of the indicative range.
By contrast, WH Group's existing shareholders have always felt the group should be priced far closer to analysts' fair value estimates. Based on the syndicate's original blended 2014 net profit forecast of $1.075 billion, this valued WH Group on a price-earnings ratio of 18.9 to 23.44 times forward earnings.
As a result the original base deal size was far smaller than the market had expected, with existing shareholders committed to selling down just 5% of their existing stake via the secondary tranche. However, they left themselves some scope to increase the deal by 20% in case strong demand for the IPO pushed the price up towards the upper end of the indicative range.
Had this upsize option and greenshoe been exercised, total proceeds would have reached $7.166 billion at the very top end of the range. So the new deal is just a shadow of its former self, which will have repercussions for the company and the market.
Repercussions
Firstly, WH Group will not raise the money it needs to pay down debt that it took on board to acquire Smithfield and reduce its net gearing from 286%. The group had been hoping to use $4 billion of the proceeds to repay a three-year syndicated loan, $389 million in unsecured senior notes and $158 million of Smithfield's inventory revolver.
Being unable to repay all this debt will also have a knock-on effect on syndicate profit forecasts for 2014.
Secondly, institutional investors are left with a dilemma. On the surface, a smaller deal size might help the share offering to perform in the secondary market as witnessed by Weibo's performance on the Nasdaq last Thursday after its IPO was cut from 20 million American depositary receipts to 16.8 million.
The Chinese social media platform saw its shares rocket on their first day trading to close up 19%.
However, Weibo does not have a large group of existing shareholders waiting in the wings to sell down their holdings as soon as market conditions allow. WH Group, on the other, hand could be looking at a significant share price overhang.
Its largest shareholder is Shanghai-based private equity group CDH, which has a 33.7% stake. Other investors including Goldman Sachs, Temasek and New Horizons.
Volatile market conditions have been one of WH Group's biggest handicaps. Most Asian markets were in the red again on Tuesday, driven down by worries over liquidity and earnings in China.
Some investors have also questioned what impact the IPO’s enormous 29-bank syndicate has had on the deal. A number of fund managers say it has been off-putting receiving calls from so many different banks.
The lack of one bank clearly in charge may also explain the strange decision to price such an enormous deal one day after the Easter holidays. This meant there was a clear danger of losing momentum among Western fund managers in the last few days ahead of pricing.
Comparables
The revised deal could see WH Group price at a discount to its own listed subsidiaries. This includes Shenzhen-listed Henan Shuanghui Investment and Development, which is currently trading at a 2014 forward p/e of 18.05 times.
Its European packaged meat business held by Spain-listed Campofrio Food Group, meanwhile, is trading at around 21.17 times, according to Bloomberg. Its US arm Smithfield was trading at about 13.2 times estimated 2014 earnings at the time of its delisting last autumn.
Another comparable is Chinese pork producer Huisheng International, which raised $31.7 million via its Hong Kong-listing in February. It was extremely popular with retail investors, with the book oversubscribed 2,000 times. But its market performance since then has been poor, with shares down about 26% by the close on April 22.
Syndicate bankers argue that it’s not a fair comparison, given the limited size of Huisheng. Instead they point to Chinese snack food giants like Tingyi Holdings and Want Want China Holdings. Both are trading at high valuations – their p/e ratios are at 30.36 times and 27.63 times forward earnings, respectively – reflecting their popularity and the continued investor interest in the Chinese consumer growth story.
Lack of integration
A number of questions remain over the operations of the company – namely how WH Group will integrate with Smithfield, the US pork producer it acquired for $7.1 billion last year.
The acquisition was universally regarded as a top selling point. It will allow the Chinese company to source pork from the US directly into the mainland and puts the producer in a strong position to benefit from consumer market trends in China, which is expected to account for the majority of global pork consumption growth in the next few years.
But the two entities remain separate for now. And it’s still not clear how the future integration of WH Group and Smithfield will work, which has made some long-only institutions and fund managers wary about investing early on. Analysts note it could be years before the two are totally incorporated.
