BoA Merrill sells remaining stake in Evergrande

The $175 million transaction comes as the share price finally returns above last year's IPO price.

A block of shares in Evergrande Real Estate Group changed hands last night when Indopark Holdings, a wholly owned unit of Bank of America Merrill Lynch, sold its remaining stake in the Chinese property developer. The HK$1.36 billion ($175 million) deal came after Evergrande chairman Hui Ka-yan on Monday said that he had settled a $1.2 billion payment owed to the strategic investors because the share price had failed to stay above the HK$3.50 IPO price.

Hui had promised he would compensate the strategic investors if the average share price fell below the IPO price between May 5 (six months after the Hong Kong listing) and November 5, and there had been some concern in the market that he may not have the finances to fulfil his promise. The share price closed above HK$3.50 for the first time since mid-April on Wednesday last week and finished at a 10-month high of HK$4.05 on Monday this week. Yesterday, it fell 2.5% to HK$3.95.

Indopark invested in Evergrande in 2006 and, according to the company’s listing prospectus, paid an average of HK$1.31 for the shares, so a sale at current levels means it has more than doubled its money.

The placement comprised 360 million shares, which equalled 2.4% of the share capital and, according to a source, represented BoA Merrill’s entire stake in Evergrande. At the time of the listing in November last year, the US bank also held a batch of Evergrande shares through the Merrill Lynch Real Estate Opportunity Fund, but that fund was transferred to Blackstone as part of BoA Merrill’s sale of its Asian real estate fund to the private equity firm earlier this year.

The shares were offered at a price between HK$3.75 and HK$3.83, which equalled a discount of 3% to 5% versus yesterday’s close. The final price was fixed at HK$3.77 for a 4.6% discount.

Most of the interest came out of Asia, with some participation from onshore US investors. The buyers included long-only investors as well as hedge funds and about 50 accounts took part in the trade. There was no information on the size of the order book, except that it was well oversubscribed.

The fact that one of the pre-IPO investors were selling, may have contributed to the interest as it will remove part of the overhang on the stock that has been caused by an expectation that they would cash out at some point. But investors were also likely inspired by another announcement by the chairman on Monday, namely that Evergrande had already exceeded its full-year sales target of Rmb40 billion ($5.98 billion) in the first 10 months this year.

Currently trading at about seven times earnings, the stock is also viewed as quite cheap and to be able to buy it in size at a further discount may have outweighed the concerns that many investors have about further government measures to clamp down rising house prices in China.

At just under six days worth of trading volumes, the deal also would have been quite easy for the market to absorb, which makes a difference from other recent placements and blocks in Hong Kong that have accounted for many more days of trading. The $1.42 billion Hang Lung Properties placement last Thursday, corresponded to 42 days of trading and Sino Land’s $663 million deal on Monday accounted for just over 40 days of volume. The combined sale of new and existing shares in pork producer China Yurun Food Group last week accounted for 28 days worth of trading.

Evergrande is one of China's largest property developers. Since it was established in 1996, the company has expanded out of its Guangzhou base to another 23 cities and at the time of listing, its landbank stood at 51.2 million square metres of gross floor area.

The deal was self-led by Bank of America Merrill Lynch.

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