China Communications Services surprises market with placement

Cisco, IBM and Blackstone take about 45% of the $242 million deal which featured CICC as the sole bookrunner.
China Communications Services (CCS), which is controlled by the China Telecom group and provides engineering and technical services to ChinaÆs five major telecom operators, surprised the market on Friday with a placement of new H-shares û the first Asian primary share sale through an accelerated bookbuild in two months.

The deal was supported by three strategic shareholders û Cisco, International Business Machines and Blackstone û who bought a combined $110 million worth of shares, but there was also solid demand for the rest of the shares, which allowed the price to be fixed at the mid-point of the offering range. This resulted in a total deal size of HK$1.89 billion ($242 million).

According to a source, the portion of the deal not bought by the strategic investors was about 2.3 times covered, which must be considered quite healthy amid the current depressed market conditions. More than 70 investors participated in the offering and, while initially most of the orders came at the bottom of the range, investors started to raise their price limits as the book grew in order to assure theyÆd get an allocation. The source says the deal was covered at the top of the range, but the company decided to set the price at a lower level in the hope of achieving a more positive aftermarket trading.

The total deal accounted for 22% of the H-share capital and comprised 359.4 million shares, of which 90.9% were new. The remaining 9.1% were secondary shares sold by the National Social Security Fund. The shares were offered in a range between HK$5.10 and HK$5.40, which translated into a discount of 4.1% to 9.4% versus the latest market price of HK$5.63 at the placement.

The final price of HK$5.25 gives a discount of 6.7%, which is slightly above the middle of where the most recent placements in Asia have priced. However, CCSÆs share price gained 6.6% on Friday before the suspension, which means the deal was completed only three Hong Kong cents below ThursdayÆs close of HK$5.28. The fact that there was no downward pressure on the share price beforehand also shows that the market did not get wind of this deal until it actually happened.

Indeed, the timing of the deal does seem a bit strange since the share price is down 30% from January 11, when it reached a record close of HK$8.06 and has only just started to rebound from a March 20 low of HK$5.04. However, the rebound has been quite sharp with an 11.7% gain over just three trading sessions and the stock is still trading 156% above its IPO price from December 2006. Market watchers said FridayÆs gains in CCS and several other Chinese telecom equipment vendors, were prompted by a report carried by ChinaÆs state media saying the parent of Hong Kong-listed China Mobile will start long-anticipated commercial trials of ChinaÆs home-grown third-generation wireless standard, TD-SCDMA, in eight cities on April 1. The news was taken as a sign the eventual launch of 3G services, which is expected to lead to heavy spending on telecom gear, is now quite close.

The placement also comes only about a week before the companyÆs 2007 earnings announcement on April 8, which raised some eye-brows since it is unusual for a company to sell new shares this close to results. A banker noted that while company insiders are prevented from selling shares within the final 30 days before the earnings, there is nothing preventing the company from issuing new shares within the same period.

CCS may also have worried that investors would be reluctant to buy if the market û and the companyÆs own share price û were to rebound any further. By doing the deal before the earnings, the company could also tap into investors who are expecting the results to be good and wished to increase their exposure before they come out. Again, the three strategic investors would have helped lift the confidence of other investors in this respect. CiscoÆs investment in particular would have been noted since it already holds about 10.8% of the companyÆs H-shares, according to data on the stock exchange website. IBM and Blackstone are both new to CCS. There was no immediate information of how much each of these three was buying, but Cisco and IBM will each have a six-month on their holdings, while US asset manager and private equity group Blackstone will be free to sell its shares again after only three months.

The source said CCS only received approval for the new H-share issue from the Chinese regulators at around lunch time Friday and decided to go ahead straight away to take advantage of the currently positive market sentiment. The Hang Seng Index has risen for four straight days and ended with a weekly gain of 10.3% on Friday. The H-share index rallied 14.7% over the same period.

However, CCS may be about to make an acquisition, which would explain the haste in raising the funds. One well-placed source says the there may indeed by an announcement in the works either before or in connection with the earnings release.

Another noticeable thing with the deal was that China International Capital Corporation (CICC) was the sole bookrunner for the placement. The fact that the Chinese investment bank is acting on its own on a Hong Kong deal that is marketed to international investors is unusual in itself, as it doesnÆt have the same distribution reach as a US or European bank. However, the bank obviously has excellent relationships within China and often acts alongside an international bank, especially on initial public offerings. That said, about 10% of the CCS offering was placed with investors in the US and another 10% went to Europe, while the remaining 80% was sold to Asia-based accounts.

But it was also interesting to note that Goldman Sachs was not on the ticket, even though it helped arrange CCSÆs initial public offering. One observer speculates that GoldmanÆs ôholdö recommendation on the stock with a target price of HK$5.40 may have played a role, as it might have made it more difficult to convince investors to buy the stock at current levels. Among the 11 analysts who cover CCS according to Bloomberg data, eight have a ôbuyö rating and three have a "hold". The average target price is HK$7.84. CICC has an "accumulate" rating on the stock, but no target price, according to Bloomberg.

However, if the company is about to make a domestic asset acquisition, it is also possible that CICC might be acting as a financial adviser and thus be the obvious choice for arranging the funding as well.

In its listing prospectus, CCS said it will seek to expand its business geographically in mainland China by pursuing selective acquisitions. In August last year, it completed an acquisition from China Telecom of various companies and businesses that provide specialised telecom services in 13 Chinese provinces (extending its coverage from six provinces previously), as well as related assets such as office building, land and equipment for about Rmb4.6 billion ($657 million). It has also said that it is exploring external growth opportunities.

Aside from the China Telecom group and the three strategic investors, CCS also counts China Mobile, China Unicom and technology-focused median and research firm International Data Group among its investors.
¬ Haymarket Media Limited. All rights reserved.
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