And the blocks keep coming

Existing shareholders in Lippo Karawaci sell $250 million of stock in support of an upcoming rights issue, while a pre-IPO private equity investor cashes in $151 million worth of shares in International Mining Machinery.

A strong run-up in share prices in recent weeks has prompted existing shareholders of two more companies to place shares. However, one of last night’s sell-downs – in Indonesian property developer PT Lippo Karawaci – was unusual in that the money raised will be used to backstop a rights issue that sources say will be announced by the company today.

The partially upsized placement raised a total of Rp2.26 trillion ($250 million) and the rights issue will be of the same size, meaning the sellers, which are all so called friends and family of the Lippo Group, will underwrite the rights issue in full. The rights shares will be offered to shareholders at the same price as the placement, one source said.

While the structure should be beneficial to the company as it guarantees that it will get the money it needs, some investors found it confusing and decided to stay away from the deal. And the accounts that did participate were also quite price sensitive, resulting in the deal pricing at the bottom of the offering range, for a 19.1% discount versus yesterday’s closing price.

International Mining Machinery

The second deal -- a sell-down in Hong Kong-listed International Mining Machinery (IMM) by private equity firm Jordan Company -- was also priced at the bottom, although a much tighter range meant it came at a significantly smaller discount to the latest close than Lippo Karawaci (6.3%). This allowed the company to raise HK$1.17 billion ($151 million). Despite good demand, the bottom-end pricing was not surprising, seeing as the share price has rallied 74% since the beginning of September to yesterday’s close of HK$7.15.

However, even on the back of those gains, the stock is trading at a discount versus its closest comparable, Sany Heavy Equipment. IMM, which designs and manufactures underground longwall coal mining equipment, is valued at about 22.7 times this year’s projected earnings, based on yesterday’s closing price, while Sany is quoted at close to 29 times. And if you use the placement price, IMM’s price-to-earnings multiple drops to 21.3. Shares in Sany, which is the largest manufacturer of roadheaders for coal mining in China, have gained about 22% since early September.

Jordan Company was a pre-IPO investor in IMM and had been expected to reduce its stake after the expiry of a six-month lockup in early August. By keeping cool and not selling straight away, the firm has managed to significantly increase the return on its investment, thanks to the recent strong share price gains. Jordan, which owns the IMM shares through an entity called JCC, will still hold about 41% of the company after this transaction and will be prevented from selling any more shares for the next six months.

The deal comprised 175 million shares, or about 13% of the company, which were offered in a range between HK$6.70 and HK$6.90, translating into a discount of 3.5% to 6.3%. As mentioned, the final price was fixed at HK$6.70 for a 6.3% discount. According to the term sheet, the seller had the option to upsize the deal, although it didn’t specify by how much.  With the price at the bottom, however, Jordan Company decided not to use this option, although a source said there was enough demand to upsize had it wished to do so.

The deal was anchored by large global investors, and was covered within an hour after the 5.15pm launch. However, most of the demand came from existing shareholders. Some hedge funds were present but the interest wasn’t wide spread as they probably thought the discount too tight. In all, about 50 investors participated in the transaction. The deal was kept open until about 11pm Hong Kong time to give London-based investors a proper chance to participate.

Investors like the stock at the moment because, as a leading provider of high-quality equipment for underground mining, it is viewed as a beneficiary of China’s efforts to close or consolidate low-standard mines that are less efficient or have a poor safety record. As the stock has rallied, the liquidity has also picked up, making it less risky for investors to hold the stock. The size of last night’s block equalled about 15 trading days.

The appetite is in stark contrast to IMM’s initial public offerings in February this year. The company raised $327 million, but the institutional tranche was reduced from 90% of the total offering to 83%, amid a rising volatility in global equity markets. There was no information of whether the institutional tranche was fully covered, although the re-allocation suggested that the quality and depth of the institutional book was not that great. However, the stock is now trading 46.5% above the IPO price of HK$4.88.

Lippo Karawaci

Meanwhile, eight existing shareholders offered a combined 3.5 billion shares in Lippo Karawaci with an option to increase the sale to 5.078 billion shares. The option was partially used, resulting in a final deal size of 4.1 billion shares. This represented a 23.6% stake in the company or about 29 days trading, based on the average turnover in the past month.

The shares were offered in a range between Rp550 and Rp650, for a discount between 4.4% and 19.1%. While this looked very generous at the wide end, the stock was actually trading at Rp5.60 as recently as October 1, so the discount may have been necessary to convince investors to participate.

According to a source, about half the deal was sold to two anchor investors – an Asia-based long-only fund, and a manager of European pension money that specialises in property investments and is also based in Asia – while the rest was split fairly evenly between Singapore, Hong Kong and domestic Indonesian accounts, as well as some European names. Just over 30 investors participated in the trade.

Based on the fact that the placement accounted for almost a quarter of the existing share capital, the rights issue is expected to offer shareholders to buy one new share for each four existing shares they own. If none of the minority shareholders take up their entitlement, the entire $250 million that was raised from the placement will be used to buy the rights shares and the Lippo associates will end up with 4.1 billion new shares – the effect being the same as in a top-up placement where existing shares are sold and new shares are bought at the same price. If minority shareholders take up their entitlement in full, then the associates will buy just the shares they are entitled to and keep the rest of the money.

There was no information about how much of the company is currently owned by the selling shareholders, except that they control a majority of the stock.

If the rights issue does happen – and there is no reason to believe it won’t, given the backstop now in place – it will be the largest equity fund raising ever by an Indonesian real estate company, according to a banker. It will also be the first time that Lippo Karawaci sells equity since 2005, although the company did tap the international bond markets for $270 million in May.

Bank of America Merrill Lynch was a bookrunner for both of the blocks, with CLSA joining as a joint bookrunner (albeit with junior economics) on the Lippo Karawaci block. CLSA was also in the market with a third deal last night – a $150 million new share placement by Philippine shopping mall operator SM Prime Holdings, which it led together with Macquarie.

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