China Resources Gas Group (CR Gas), a distributor of natural gas, petroleum gas and liquefied petroleum gas (LPG) in China, has raised HK$2.71 billion ($350 million) from a top-up placement, taking advantage of a sharp run-up in its share price. The stock gained 4.5% to a fresh five-year high on Monday and was up 66% year-to-date before the deal.
The company, which has been expanding aggressively through acquisitions in recent years, is viewed as one of the leading names in the China gas sector and is generally well-liked by investors and analysts.
However, there was a lot of noise surrounding the transaction, partly because most banks — and supposedly therefore many of the investors with whom they were sounding out a potential deal — appeared to take a different view to the company with regard to what discount would be needed to clear the trade. The deal was initially bid out to a small group of primarily lending banks on Monday night, but the issuer didn’t mandate anyone and instead invited a second round of bids from the wider investment banking community yesterday morning.
The mandate to arrange the transaction eventually went to Morgan Stanley and when the deal launched in the mid-afternoon yesterday it emerged that the US bank had agreed to deliver a deal at a maximum discount of 8.2%. This was significantly below the levels that other banks were said to have thought necessary and hence prompted market participants to question whether it may be too tight. Indeed, relative to the average closing price in the past five sessions, the maximum discount was only 4.2%.
CR Gas is a fairly illiquid stock — this deal accounted for about 120 days of trading — and according to sources, several other bids had indicated a discount in the 10% to 12% range.
In return for the tight discount, it seems CR Gas had to reduce its desired deal size, however. When it invited banks to bid yesterday morning, it was looking for a hard underwritten deal of 200 million shares, but when Morgan Stanley launched the deal in the mid-afternoon, the structure had changed to a base deal of 160 million shares plus an upsize option of 40 million shares.
The upsize option wasn’t exercised, and the tighter discount didn’t really make up for the smaller deal size. If the company had sold 200 million shares at a 12% discount, for instance, the deal size would have been $419 million and at a 10% discount it could have raised $429 million.
Instead, the shares were offered at a price between HK$16.95 and HK$17.35, which translated into a discount of 6% to 8.2% versus Monday’s closing price of HK$18.46. (The stock was suspended yesterday pending the launch of the deal.) At 160 million shares, the deal accounted for 7.75% of the existing share capital.
Given the background noise, there was never really any doubt about where it would price. Everyone assumed it would come at the bottom of the range for the maximum 8.2% discount, and so it did.
The key question was whether it would clear, or put another way, whether there would be demand for the entire deal. A source close to the offering insisted that there was and said Morgan Stanley had placed the full 160 million shares with external accounts.
As is often the case on sole bookrun deals, speculation about whether that was actually the case remained rampant, however, and skeptics noted that Morgan Stanley’s name was showing up on the offer side of the trading screens this morning. It is of course possible that the bank was in the market on behalf of clients, but either way, this added fuel to the speculation that it was left holding part of deal.
In support of the discount, one source noted that the more recent CR Gas deal — a $317 million top-up placement in September 2010 — was completed at a 5.2% discount. That deal was also larger on a relative basis, accounting for 14% of the existing share capital and about 170 days of trading volume. Credit Suisse was the sole bookrunner for that trade.
The stock fell when it resumed trading yesterday, but perhaps not as much as some market watchers had feared. When the morning session closed at noon, it was down 9.1% at HK$16.78, which put it 1% below the placement price. The lowest level it hit during the morning session was HK$16.52, which represented a 10.5% drop from the previous close.
The Hang Seng Index was up 0.2% at midday.
According to a source, the majority of the deal was bought by Asia-based investors, but there was also good demand from the US, including some orders from utility-focused funds. The order book was said to have had a good balance between long-only accounts and hedge funds and included more than 40 investors.
Investors were told at about 7pm Hong Kong time yesterday that the deal was about three-quarters covered, which may have given the deal some momentum as the marketing shifted to the US. However, by that time the deal had been open for at least three-and-a-half hours and some may have expected it to be covered already. The order books closed at 10pm.
CR Gas told investors that it will use the proceeds to fund the acquisition of more downstream city gas distribution businesses in China, but didn’t mention any specific targets. This meant that the deal was viewed to be fairly opportunistic in nature, particularly in light of the recent share price gains — the stock has rallied 17% since late October alone.
The company does have a track record of making accretive acquisitions, however, and after a series of asset injections from the China Resources group, it has recently started to shift its attention to third-party acquisitions. In May it agreed to buy AEI China Gas for $237.7 million from a group of investors, including Goldman Sachs.