Busy night sees four block trades hit the market

NEC offloads its entire stake in Lenovo, raising $230 million, while Prudential exits Taiwan's China Life Insurance through a $156 million transaction.
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NEC last night sold its entire stake in Chinese PC maker Lenovo
<div style="text-align: left;"> NEC last night sold its entire stake in Chinese PC maker Lenovo </div>

It didn’t look like the most obvious day to do a deal with the US closed for Labour Day on Monday and Asian stock markets under pressure yesterday after Moody’s downgraded its outlook on the EU, but four block trades nevertheless hit the market after the close.

Perhaps the sellers wanted to get ahead of a potential sale of shares in pan-Asian life insurer AIA Group by American International Group (AIG), which could soak up a lot of excess demand if it does happen. AIG still owns a 17.6% stake AIA, which it became free to sell yesterday when its latest six-month lock-up expired. The stake is worth more than $7 billion.

Also in the insurance sector, Prudential last night sold its entire stake in Taiwan-based China Life Insurance Co, raising NT$4.68 billion ($156 million), while Japan’s NEC Corp offloaded all of its shares in Chinese PC maker Lenovo through a HK$1.78 billion ($230 million) transaction.

Also in the market were two smaller blocks in AAC Technologies and Brilliance China Automotive that were seeking to raise up to $109 million and $118 million respectively.

Although the largest of the four, the Lenovo trade got done pretty quickly, thanks to the presence of anchor orders that gave other investors the confidence to come in as well. According to a source, the bookrunners (Credit Suisse) had indicated buyers for most of the shares before launch and the deal was covered within the first hour. Because of that — and the fact that the deal wasn’t open to onshore US investors, the bookrunners stopped taking orders after just 90 minutes, at 7.15pm Hong Kong time. By then there were already more than 50 orders in the book and the deal was said to be well oversubscribed.

However, the price was kept towards the bottom end of the price range, suggesting that’s where the anchor orders were positioned.

The deal comprised approximately 281.1 million shares, which translated into about 2.7% of the existing share capital and some six days of trading volume. They were offered at a price between HK$6.30 and HK$6.50, equal to a discount of 1.8% to 4.8% versus yesterday’s closing price of HK$6.62.

The price was fixed at HK$6.35 for a 4.1% discount.

Most of the anchor orders were said to have been from hedge funds and while long-only investors did come in as well, the source described the final order book as hedge fund-biased.

NEC, which today focuses primarily on IT solutions and network technologies, received the Lenovo shares in January 2011 when the two firms agreed to set up a joint venture that combines their respective personal computer businesses in Japan. As payment for injecting its larger PC business into the venture, which is 51% owned by Lenovo, NEC received Lenovo shares worth $175 million.

The JV, which is the market leader for PCs in Japan, won’t be affected by the fact that NEC is selling the shares. However, the intention all along has been for Lenovo to take full control over time. The Chinese company has a call option to buy the remaining 49% from NEC, while NEC has a put option to sell its stake to Lenovo. Both of these can be exercised after five years at a maximum exercise price of $275 million. NEC will also receive another $50 million from Lenovo if the JV achieves certain defined financial milestones in the five fiscal years to March 2016.

NEC has been disposing of other non-core holdings as part of an on-going effort to halt a loss-making trend and return the company to profitability. And given the plan to eventually exit the JV, NEC was never expected to hold the Lenovo shares for the long-term. However, the timing of the sale still came as a bit of a surprise as there was supposed to be a two-year lock-up on the shares from the time JV agreement closed in July 2011.

In a statement published on the Hong Kong stock exchange website after the completion of the block trade last night, Lenovo said that it had agreed to waive the lock-up after weighing all the relevant factors, including the ongoing cooperation between the two firms and NEC’s financing needs.

The sale came after Lenovo announced yesterday that CEO Yang Yuanqing is due to make an announcement in Brazil today that it referred to as “the biggest announcement in the company’s history in Brazil”. The brief statement pushed up Lenovo’s share price by 1.2% in an otherwise mostly declining market. The stock is up 27.8% this year, compared with a 5.4% gain in the Hang Seng Index.

The company said in July that it plans to invest $30 million to build a computer factory and a distribution centre in the Brazilian state of Sao Paulo. The facility will have as many as 700 employees in two years, when it is expected to reach maximum capacity.

China Life Insurance
The block in China Life Insurance, which despite its name is a Taiwanese life insurance company, came as much less of a surprise. In fact, the market had been expecting Prudential to sell its stake as soon as it would be able to and the share price has fallen on eight of the past nine trading days, losing a total of 7.3%, as investors have been positioning for a deal. On the ninth day it was flat.

According to a source, Prudential received the shares in connection with an acquisition, but initially they were held as private securities that couldn’t be traded. They were converted into common public shares only recently.

The UK insurance company offered to sell all of its 179.476 million shares at a price between NT$26.05 and NT$26.30, which translated into a discount of 2% to 3% versus yesterday’s close of NT$26.85.

The final price was fixed at NT$26.10 for a 2.8% discount, which is quite tight for a deal that accounted for 7.7% of the share capital and about 13 days of trading. Taiwan blocks tend to come at quite tight discounts, but it also clearly helped that the deal was widely expected.

On top of that, this transaction too had an anchor order from a large long-only institution, which accounted for a significant portion of the deal, the source said. In all, about 30 investors participated in the transaction, which was said to have been a couple of times covered. The short-selling leading up to the deal obviously suggests that hedge funds were present, but, according to the source, there were also a number of investors who wanted to go long the stock and the buyers included a good mixture of account types.

Some 65% of the analysts covering the company, according to Bloomberg, have a buy rating on the stock and their average target price is NT$38.15, which implies 46% upside from the placement price. The share price is up 9.6% so far this year, versus a 5.4% gain in the benchmark Taiwan index.

HSBC and UBS were joint bookrunners.

Brilliance China and AAC Technologies
UBS was also the sole bookrunner for the Brilliance China block, which comprised 125 million secondary shares. They were offered at a price between HK$7.17 and HK$7.30 each, which translated into a discount of 3% to 5% versus yesterday’s close of HK$7.55. The seller was the company’s ultimate controlling shareholder, Huachen Automotive Group Holdings, whose remaining shares will be locked up for 90 days.

Brilliance China is a Hong Kong-listed manufacturer of cars, minibuses and auto components. It operates a car-making joint venture with BMW and a minibus-making joint venture with Toyota.

The final deal in the market last night comprised 33 million shares in AAC Technologies, a Hong Kong-listed manufacturer of micro-components, such as acoustics, antennas, optics, and Lithium-ion polymer batteries for communications and consumer electronics products.

The shares were offered at a price between HK$25 and HK$25.65, which equalled a discount of 5% to 7.4% versus the latest close. The seller was Ingrid Wu, who is a non-executive director and co-founder of the company. She is also married to the current CEO, Benjamin Pan.

According to a source, the price was fixed at HK$25.35, for a 6.1% discount and a total deal size of $108 million. No further details were available.

J.P. Morgan was the sole bookrunner.

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