Beijing Enterprises brings rare China EB

Red chip breaks lock-up to raise new cash.

Beijing Enterprises Investment Ltd (BEIL), the investment holding company controlled by the Beijing municipal government, raised $118 million on November 30 from an exchangeable into its Hong Kong listed subsidiary Beijing Enterprises Holdings Ltd (BEHL).

The Deutsche Bank-led deal represents the only equity-linked offering by a Chinese entity so far this year. It has also come at a time when equity-linked issuance from Asia remains extremely thin, with issuance levels for the year still at roughly half of 2004 levels.

These two factors combined helped ensure a strong take-up for the deal, which closed eight times subscribed after a 90 minute bookbuild. About 100 investors are said to have participated, with a split of 50% Europe, 30% offshore US and 20% Asia.

The only surprising factor about the deal was its launch so soon after a $67 million old share offering by the parent back in September. Deutsche Bank also led this deal, which was priced at HK$12.90, with proceeds used to buy non-core assets back off the list co. In order to seek a waiver to break the six-month lock-up, the German bank's approval was necessary and it is for this reason that the mandate is believed to have been rotated away from UBS.

Terms for the five-year exchangeable comprise an issue price of par, three-year put price of 109.34% and redemption price of 116.05% to yield 3%. There is also a conversion premium of 15% to the stock's HK$13.30 close on Wednesday and a three-year call option subject to a 130% hurdle.

The only marketed aspect of the transaction was the yield, which was pitched between 3% and 3.5%.

Underlying assumptions comprise a bond floor of 88%, implied volatility of 29% and theoretical value of 101.79%. This is based on a credit spread of 250bp over Libor, borrow cost of 2%, dividend yield of 2.3% and 260-day volatility of 31%.

Despite the availability of borrow, the stock did not come under too much pressure yesterday, closing about 3% down on the day. The exchangeable itself rose to about 101.50%.

On full conversion, BEIL's stake in BEHK will drop from 60.8% to just above 50%. The parent has been re-structuring the list co, which is increasingly becoming an infrastructure and utilities play rather than a consumer and leisure play.

By the end of the first half of 2006, BEHK is scheduled to purchase Beijing Gas in a transaction that has been valued at over $1 billion. In order to reduce funding pressures on the list co, the parent has been re-purchasing non-core assets. Analysts estimate the parent will purchase up to $180 million.

They also estimate that the acquisition could improve 2007 EPS by up to 50%. Year-to-date, the stock is up about 15%.

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