Citigroup yesterday stunned the market with one of the more audacious trades of the year - selling Cable & Wireless's remaining 14% block of the company for $400 million.
The hard underwritten deal was covered within an hour of the deal's launch, although the transaction was not closed until five hours later, at which point it was 4.3 times subscribed.
Citi priced the deal at the tight end of the range, which at HK$4.78 was a 9% discount to the prevailing PCCW stock price. No fee was disclosed, but FinanceAsia calculates that Citi made around $19.2 million. To put this in perspective, that is about 50% of the entire equity capital market fee pool paid in the first quarter.
But as one banker put it, that is a fee well earned: "The risk of getting long even a quarter of a PCCW deal is enough to make a risk manager's stomach turn."
However, Citi called the market exactly right, and 60 minutes into the deal the syndicate desk knew it was going to have a successful deal. Indeed, Citi moved the price discount range in from a 9-12% range to 9-10% thanks to a series of lead orders that were relatively non-price sensitive. Indeed, the deal was so hot that several orders amounted to around 20% of the deal size.
The distribution was mostly into Asia (56%), with the US representing 17% of demand and Europe the remainder. About 50% of the deal was bought by hedge funds, with 18% going to private banking clients and 32% going to long only fund managers.
Rival bankers point out that bringing the latter in was a substantial achievement, as only six months ago they had balked at the idea of buying PCCW even at a 25% discount.
Citi's achievement is all the more stunning when you consider that the block that was sold represented 76 days of PCCW's normal average trading volume. The block also represented 30% of PCCW's free float.
So why did it work? ECM bankers say that there has been a notable pick up in markets in recent weeks, with large amounts of momentum money entering the Asian markets. "And PCCW is the ultimate momentum stock if you think the Hong Kong market is gong North post-SARS," comments one banker.
Another technical reason involved stock borrow. On Monday a $200 million UBS stock borrow facility expires. The expiry of the stock borrow is thought to have led a substantial demand from hedge funds looking to cover their short positions.
For Cable & Wireless this will be viewed as a success. The 9% discount is a good price in the view of most observers, and the fact that Citi gave the UK company the certainty of funds no doubt pleased a management that was reluctant to get egg on its face.
However, it must be pointed out that when C&W sold HKT to PCCW back in 2000 the stock component of the deal was valued at $5 billion. Now with its final shares sold it is possible to calculate that it received only $1.9 billion for the stock it received, which is not the result it probably envisioned at the time.
As for Citi, it has earned a great fee albeit one which was heavily performance based. By coming in at the tight end of the range it secured the maximum fee. And in many ways the whole episode signals a return to investment banking 101. With fees on most equity deals heavily commoditized, investment banks can only expect to earn decent fees when they take commensurate risk. Investment bankers really show their true worth when they do the sort of transaction that Citi did yesterday - that is, when they read the market perfectly.
