Last nightÆs deal was a case in point as the seller, although still committed to CCS, wanted to take its initial investment in the company off the table. According to a source, the original stake has grown substantially since it was bought. The seller will thus still hold a significant stake in CCS after this transaction and has agreed to a 60-day lock-up on its remaining shares.
CCS is a Chinese company that offers infrastructure services, business process outsourcing, and other services to telecommunications companies. China Telecom owns a controlling stake, but CCS serves all five of China's major telecommunication companies, including its owner, China Mobile and China Unicom.
A total of 62.5 million shares were offer, and the indicated price range was set at HK$5.58 to HK$5.78 a share, which translated into a discount of 4.9% to 8.2% versus yesterdayÆs close of HK$6.08. The books were closed after only 45 minutes, with the share price being set in the middle of the range at HK$5.70, resulting in a discount of 6.25%.
The deal was carried out as part of a total return swap, which saw the vendor lend the shares to Morgan Stanley which then sold them on to the market to offset its risk. Under the swap agreement, Morgan Stanley will compensate the initial vendor for any increase or decrease in the share price during the life of the swap, but since it is acting solely as an intermediary, the investment bank itself isnÆt at risk whichever way the share price is moving. This structure was used as the vendor wanted to sell, but for accounting reasons needed it to look like it still owns the shares.
The offering was about five times covered and attracted around 45 investors, who were described by a source close to the deal as being ôa pretty good cross-section of investorsö including a mix of long only accounts and hedge funds. Nearly all of the demand came from Asia.
This is the second placement of CCS stock this year following a sale of $242 million worth of primary shares at the end of March. During that deal, which was arranged by China International Capital Corp, three strategic investors û International Business Machines, Cisco, and Blackstone û took $110 million worth of shares. While IBM and Cisco were locked up for six months, US asset manager Blackstone was only subject to a three-month lock-up and could in theory be selling now. However, yesterdayÆs vendor was believed to have made its initial investment a lot earlier than that to make it worthwhile to sell now. CCSÆs share price has gained 159% since the IPO in December 2006 and is up 8% versus the April transaction.
Since that placement, the company has announced its 2007 results, which showed a 21.9% increase in revenues and a 14% improvement in gross profit. The company also reported some short-term benefits from an announcement in May outlining details of the restructuring of ChinaÆs telecom industry. The restructuring is expected to increase the demand for infrastructure products as China's networks go from 2G to 3G. CCSÆs share price peaked at HK$7.17 at the end of May, only to drop 31% to HK$4.95 by early July. In the past three weeks, the stock has risen 19%.
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