Adani Power, which will open the books for its up to Rs30.2 billion ($625 million) initial public today, has become the first Indian listing candidate to use new rules that allow companies to sign up anchor investors through a bookbuilding process one day before the formal order taking starts. And according to sources, the process was a success with potential anchor investors submitting orders for twice the amount of shares available for this "tranche" and the bookbuilding resulting in a price of Rs95 per share -- or the mid-point of the indicated price range.
Under the new rules, which were announced in June, companies can sell up to 30% of the shares reserved for qualified institutional buyers (typically 60% of the total issue), to anchor investors. This means that 18% of Adani Power's offering will already be covered when it opens to other investors today, which should send a positive message to other investors. The price agreed with the anchor investors is also likely to serve as a benchmark, even though it may be adjusted higher or lower depending on the outcome of the online bookbuilding.
The anchor investors will also provide some stability once the shares start trading since they are not allowed to sell their shares for the first 30 days.
The key benefit for the anchor investors is that they are able to buy a more meaningful stake in the company than what they can typically do through the online bookbuilding where the shares are allocated on a pro rata basis. In the past this has forced large regional funds to inflate their orders beyond what they actually wanted, but this too had its limits since no one investor is allowed to submit orders for more than 10% of the total offer size.
Under the new system, investors can put in orders for exactly the amount they want, at the price they want to pay, and the bookrunners will be able to allocate the shares on a discretionary basis to achieve the best possible combination of quality investors and price. In return for getting this prioritised allocation, the anchor investors will have to put down a 25% deposit when they submit their orders (as opposed to 10% if they subscribe through the regular online bookbuilding) and they are also at risk since they will have to pay the difference if the online bookbuilding results in a higher price than that agreed with the anchor investors. If the final price should end up lower than the pre-agreed price, on the other hand, the anchor investors will get no refund.
According to a statement posted on the National Stock Exchange of India website last night the anchor portion of the Adani offering will be allocated to six different investors, some of which will take shares through several sub-funds, which suggests an average allocation of about $17 million worth of shares. The six buyers are: Ecofin Limited, AIC Advantage Fund, CLSA, T Rowe Price International, Sundaram BNP Paribas Mutual Fund and Credit Suisse.
The company is offering 301.65 million new shares, or 13.8% of the company. Of this, 8 million shares are set aside for company employees, leaving 293.65 million shares to be sold to public investors, with 60% going to qualified institutional buyers (QIBs), 30% to retail investors and 10% to corporate investors. The price range has been set at Rs90 to Rs100, which will give a total deal size (including the employee portion) of Rs27.1 billion to Rs30.2 billion ($563 million to $625 million). At the mid-point, or the price derived at following the anchor investor process, the company will raise $595 million.
The regular online bookbuilding will be open from today until Friday. DSP Merrill Lynch is the sole global coordinator and will also act as one of eight book running lead managers together with Enam Securities, IDFC-SSKI, JM Financial, Kotak Mahindra, Morgan Stanley, ICICI and SBI Capital Markets.
Adani Power is in the process of constructing four thermal power plants with a total generating capacity of 6,600 megawatts that are scheduled to come online between February 2010 and April 2012. However, according to sources the execution risk is relatively low compared with a typical greenfield project since all the financing is already in place and all the land rights are already acquired. The company has also secured two-thirds of the thermal coal needed to run the four plants and has sales agreements for 70% of the planned output.
Investors also like the company because of the support from the Adani group.
"These guys are good at execution, which is reflected in the investor interest," one source close to the offering said following the completion of the anchor investor process.
Adani is the first among a series of power sector companies expected to list in India in the coming few months to take advantage of the positive buzz surrounding the power industry after Indian prime minister Manmohan Singh pledged before his re-election in May to boost investments in the power sector to meet the rapidly growing demand for electricity.
Next in line will be government-owned NHPC Limited (formerly known as National Hydroelectric Power Corporation), which is expected to raise towards $1 billion in an August IPO. The company is said to have submitted a formal filing with the regulators yesterday. The government will sell a 4.5% stake in the company, or just under one-third of the offering, while another 10% or so will be sold in the form of new shares issued by the company. Enam Securities, Kotak Mahindra, and SBI Capital Markets are the joint bookrunners.