Agricultural Bank price range implies base deal of max $21 billion

An H-share cornerstone tranche of $5.45 billion, massive anchor interest and a valuation discount versus ICBC and CCB suggest selling the deal will be no issue.

Agricultural Bank of China (ABC) has set the price range for the H-share portion of its initial public offering at a level that confirms a significantly smaller deal than what the bank first indicated when it hired its bookrunners in early April.

Sources said late yesterday that the H-shares will be offered to investors at between HK$2.88 and HK$3.48 apiece, which implies a deal size of HK$73.3 billion to HK$88.4 billion ($9.4 billion to $11.4 billion) before the exercise of the 15% greenshoe. ABC, which is the largest retail bank in the world with 320 million customers, is kicking off the formal H-share roadshow today and is scheduled to list in Hong Kong on July 16 -- one day after its Shanghai trading debut.

The price range for the A-share portion has not yet been revealed, although sources said it is expected to start at the same level as the H-share range (adjusted for the exchange range) but not go quite as high on the top end. This would allow the H-share portion to price at a slight premium, although supposedly the intention is to price both portions at the same level.

Assuming this will be the case, the bottom end of the H-share price range implies a total deal size of $17.7 billion, while the top suggests a maximum deal size of about $21 billion. That would mean that the bank will need to price towards the top end of the range and exercise the greenshoe for the offering to surpass Industrial and Commercial Bank of China's $21.9 billion offering in 2006 to become the largest IPO in the world. While that seems entirely possible, given the current hype surrounding the deal, it will still leave the deal well short of the initial $25 billion to $30 billion target.

For those who have been watching the market over the past couple of months, rather than just reading the headlines, this should come as no surprise. Share prices for ABC's Hong Kong-listed peers are down significantly from their early-April peaks amid concerns that the debt crisis in Europe would lead to a renewed economic slowdown globally and in response to the sizeable fundraising plans by China's top banks.

Sure, there has been a bit of a rebound in the past couple of weeks, but Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC) are still down 5.9% and 6.4% respectively. China Construction Bank (CCB), which saw a 5.2% jump on Tuesday, is off 2.3% from its April high. And with ABC generally expected to price at a valuation above BOC, but below ICBC and CCB, this matters.

Based on the average of the joint bookrunner estimates, the H-share price range values ABC at 1.53 to 1.76 times its 2010 book value, on a post-money, post-shoe basis. This compares with a price-to-book value of 1.57 times for BOC, 2.13 times for CCB and 2.19 times for ICBC, sources said last night.

The final A-share price will be determined on July 5, while the H-share price will be set a day later on July 6.

Meanwhile, earlier concerns that ABC -- which has historically been viewed as the weakest of China's big four state-controlled banks -- may struggle to attract enough demand for its potentially record-breaking issue in the still quite volatile market, have completely faded. In fact, interest in the deal has seemingly been overwhelming. The enthusiasm has been fuelled by daily leaks to the media over the past week about who will participate in the transaction as cornerstone investors and how big an investment they will make.

Sources say the preliminary listing document that will be available to institutional investors from today will confirm reports that $5.45 billion of the H-share tranche has already been placed with 11 cornerstones, meaning between 48% and 58% of the base deal has been sold before today's official launch of the bookbuilding. And that, in turn, leaves a deal size of only $4 billion to $6 billion -- which is definitely large, but not excessively so.

On top of this, the seven bookrunners for the H-share tranche have also lined up a long list of willing anchor investors. One source said they have received orders from some 60 investors and that this demand alone exceeds the entire base deal, including the cornerstone tranche. Anchor investors make a commitment to invest a fixed amount at launch (at the final IPO price) to help create momentum in the bookbuilding, but contrary to the cornerstones, they are not locked up after the listing. They are also not listed in the prospectus.

These attempts to defuse the concerns about the size and reduce the execution risks means that even though the formal institutional bookbuilding doesn't actually kick off until today, a lot of investors have actually already met with the ABC management.

As one source put it: "This must be the most marketed IPO in history - before launch. Everybody who counts have already seen the company at least once,"  

Thanks to all this demand, it seems the hardest part of the offering will not be to sell the deal, but to manage the allocation. The fact that there is this much demand that is supposedly not valuation sensitive, suggests that ABC has a good chance of being able to price the deal at least in the upper half of the range, barring another big downturn in the overall market.

As has been widely reported, the 11 cornerstones are led by Qatar Investment Authority, which is buying $2.8 billion worth of shares. The others are: Kuwait Investment Authority, $800 million; Standard Chartered Bank, $500 million; Rabobank Groep, $250 million; Seven Group Holdings, $250 million; Temasek Holdings, $200 million; China Resources Co, $200 million; China Travel Service, $150 million; Archer-Daniels-Midland Co, $100 million; Cheung Kong (Holdings), $100 million; and United Overseas Bank, $100 million.

To ensure that not all of those share will come back to the market at the same time, the bookrunners are said to have been working hard on getting the cornerstones to agree to a staggered lockup structure. It is unclear exactly how that will work, but ABC has announced that the cornerstones on the A-share tranche will have a 12-month lockup on 50% of their shares and 18-months on the rest, so it may have done something similar on the H-share portion. It is also possible that Qatar Investment Authority, given the size of its investment, will have had to commit to holding a portion of its shares for an even longer period.

The H-share tranche makes up 53.3% of the combined A- and H-share offering and 8% of the company, pre-shoe. The base deal comprises approximately 25.412 billion shares, of which 5% has been earmarked for Hong Kong retail investors. In case of strong retail demand a clawback mechanism may boost the size of the retail tranche to as much as 20% of the total H-share offering.

ABC is also selling 22.235 billion A-shares, representing 7% of the enlarged share capital. The A-share offering too will also have a cornerstone tranche - referred to as a strategic placement - although it is a lot less clear what that will look like. Sources say it may account for as much as 46% of the total deal and will include a number of state-owned companies and frequent IPO investors like the mainland insurance companies. No names have been confirmed as yet, however.

With only days to spare before the formal launch of the deal, ABC finally named the global coordinators for the H-share tranche over the past weekend. As indicated by the division of labour within the group in recent weeks, the coordinators are China International Capital Corp, Goldman Sachs, Morgan Stanley and ABC's own investment banking arm, ABC International.

The other bookrunners are Deutsche Bank, J.P. Morgan and Macquarie. The A-share tranche is being arranged by CICC, Citic Securities, China Galaxy Securities and Guotai Junan Securities. 

For details about Agricultural Bank and analyst expectations of its growth potential post listing, please look at our earlier story: Getting to know your ABC.

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