AU Optronics raises $325 million from ADR sale

The deal came after a sharp bounce in the share price and was priced at a 10% discount before the start of the US trading session last night.
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AU Optronics: Taiwan’s leading manufacturer of TFT-LCD panels</div>
<div style="text-align: left;"> AU Optronics: Taiwan’s leading manufacturer of TFT-LCD panels</div>

AU Optronics, Taiwan’s leading manufacturer of TFT-LCD panels, last night raised $325.6 million from the sale of new American depositary receipts. The deal came after the ADR price had jumped 11.1% to a 52-week high this week and followed the release of first-quarter earnings on Tuesday.

Partly thanks to the jump in the share price, partly in response to the fact that the New York Stock Exchange-listed ADRs aren’t that liquid, the securities were offered at a pretty wide discount and the final price was fixed 10% below the latest close.

However, the deal was initially launched without a price range, which meant that this would have been the level where the real demand was. Sources said the lack of a price range was due to the fact that the bookrunners were prepared to keep the deal open during the US trading day, in which case the shares would end up being marketed against a live price. Since the deal didn’t hit the market until 6.45pm Hong Kong time, that did seem like a possibility indeed.

But investors turned out to be quite eager to get their hands on the stock ― at a good price ― and within the first hour the bankers decided to close the order books and allocate the deal before the opening of US trading. At that time they also announced price guidance of between $4.33 and $4.50 per ADR, which translated into a discount of 8.0% to 11.5% versus Wednesday’s close of $4.89.

The price was eventually fixed at $4.40 for a 10% discount, which was equal to the closing price of the ADRs on Friday last week.

The company sold 74 million ADRs, which account for 8.4% of the existing share capital. Each ADR is equal to 10 Taiwan-listed common shares. The deal also comes with an overallotment option to sell an additional 6 million ADRs, which could increase the total deal size to $352 million.

The initial term sheet said the company was aiming to raise about $350 million from the sale.

The overallotment option wasn’t exercised on the first day and the share price may need to stabilise at or slightly above current levels for the bookrunners to go ahead and do that, particularly since the buyers were said to have included quite a few hedge funds.

The ADR price dropped to $4.40 in the first 10 minutes of US trading last night, but then recovered and traded above $4.45 for some time before dipping again. It closed 0.9% above the placement price at $4.44, which translated into a 9.2% drop from the previous day.

According to a source, the deal ended up multiple times covered, although as noted a sizeable portion of the demand did come from hedge funds that were no doubt attracted by the relatively wide discount. About 80% of the order amount came from Asia, including some local Taiwan accounts that are able to buy international equities via offshore accounts. The remaining 20% of the demand was generated out of the US.

The relatively small participation from US accounts was likely partly due to the fact that the order books closed at 8.30am New York time.

In all, more than 60 investors came into the deal, the source said.

The deal was expected since AU Optronics had earlier flagged its intention to raise between $300 million and $350 million specifically through the sale of ADRs. Shortly before the deal launched yesterday it made a shelf filing to the US Securities and Exchange Commission.

The fact that it had chosen to sell in the ADR format worked out nicely since the ADRs have been trading at a sizeable premium versus the underlying common shares. One source said the premium has been at least 5% recently. Indeed, after opening 4.8% higher, the local share price closed up only 0.4% at NT$13.60 yesterday, which was the first day that Taiwan investors were able to trade on the earnings report since the Taiwan market was closed for May Day on Wednesday. That compares to a 5.5% jump in the ADR price in the aftermath of the release on Tuesday.

AU Optronics reported a net loss of NT$3.3 billion ($111 million) for the first quarter, but the short-fall was smaller than analysts had expected. Also, the company said that its gross margin improved by 3.2 percentage points to 4.8% despite a drop in revenues, mainly thanks to a better product mix and yield improvement. The operating margin was still negative (-1.4%), but the Ebitda margin improved by 3.9 percentage points to 16.3% and the display segment turned profitable at the operating level.

The company said it will use the proceeds for the follow-on ADR offering to buy raw materials and components overseas.

Citi was a global coordinator for the deal as well as a joint bookrunner together with UBS.

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