CDH sells WH Group block before lockup expires

Chinese private equity firm breaks lockup by returning to market with a new $806 million deal only two months after its last divestment.

CDH Investments made an unexpectedly early return to market with the divestment of roughly one third of its stake in Hong Kong-listed WH Group on Thursday. The private equity firm was back with a HK$6.25 billion ($806 million) sale only two months after a previous sale of the pork producer’s shares in late August.

At that time, the PE firm raised $900 million from the sale of 1.17 billion shares and agreed to a six-month lockup. This meant it should not have been able to conduct another deal until February next year.

However, the move is not without precedent and allowable if a company or its advisors waive existing obligations. Morgan Stanley was the sole bookrunner for both of CDH’s share sales.

This time round, CDH has offered 1 billion shares at an indicative price range of HK$6.22 – HK$6.48 per share, which represents a 4.6% to 8.4% discount to WH Group’s HK$6.79 close on Thursday.

This means the deal has been pitched at a wider discount range compared to August when CDH offered the shares at a 3.4% to 5.8% discount to the close before settling at a final discount of 4.95%. 

Then management purchased 19% of the deal according to equity analysts, who are likely to closely examine the distribution statistics for the current deal to see if management have retained their faith in the company’s growth prospects. Back in late August, UBS suggested management would continue to finance future increases to their 36.01% stake via higher dividends.

The current price is also notably higher than August in absolute terms because WH Group shares have gained 8.4% since the last sale, outperforming the benchmark Hang Seng Index, which has gained 1.3% over the same period.

Eventually the sale has been finalized at HK$6.25 per share, netting $806 million for the private equity firm and reducing its shareholding to 13% from 19.8%.

It has agreed to a further nine-month lockup for its remaining stake, according to a termsheet seen by FinanceAsia.

Stock overhang

CDH’s new sale does nothing to reduce the overhang on the stock since it is very likely to offload its remaining stake in the future.

In fact, CDH first attempted to sell its shareholding, together with a group of other pre-IPO investors, when the pork producer made its first, unsuccessful listing attempt in April 2014. However, the company was forced to drop the secondary share portion in a downsized deal four month later.

Now it remains to be seen if other pre-IPO investors, including Goldman Sachs, Temasek and New Horizons, will follow CDH and offload their stakes. The one-year lockup for their shares expired in August last year.

CDH’s timing is also intriguing since it has launched its deal two trading days before Cofco Meat makes its stock market debut on November 1. The meat production subsidiary of Cofco Group, which raised $251 million from an initial public offering earlier this month, counts WH Group as its closest comparable.

Market participants believe CDH might have chosen to sell before Cofco Meat lists because the latter will be viewed as a cheaper and more attractive alternative. Cofco Meat, for example, will list at 6.8 times forecast 2017 earnings, which represents a deep discount to WH Group’s 12.8 times earnings based on Thursday’s closing price.

WH Group shares could come under pressure if hedge funds try to take advantage of the valuation gap by shorting.

And the pork company has come under rising short selling pressures recently. It has recorded a double-digit short selling ratio for six consecutive days through to Thursday, with total short selling turnover of $23 million and a ratio of 14.8%.

Timing of the deal was also dictated by the company’s third quarter earnings, where were released on October 26. These slightly beat analysts’ expectations, with revenue rising 3% year-on-year to $5.4 billion and Ebit by 19% to $460 million. 

This article was updated with final pricing details.

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