Citi sold its remaining stake in India’s Housing Development Finance Corp (HDFC) on Friday through a Rs95.51 billion ($1.9 billion) self-led block trade that is by far the largest primary equity transaction in Asia ex-Japan so far this year.
The well-received deal followed a smaller sale of HDFC shares by Citi in June last year that took its stake below 10% to comply with the upcoming Basel III guidelines. Last week’s sale comprised its remaining 9.85% stake and saw Citi exit the Indian financing company that it has been invested in since 2005. HDFC provides mortgages to individuals and companies as well as construction finance to real estate developers.
The sale also follows a number of smaller block trades in India during the past month as shareholders like Carlyle, Warburg Pincus and Temasek are trying to take advantage of the strong pickup in share prices and investor appetite so far this year. And last week saw the first capital raising of size when Dewan Housing Finance Corp sold $62 million worth of shares through a qualified institutional placement (QIP).
After being one of Asia's laggards last year — the benchmark Sensex index lost 25% — India’s stock market is a top performer so far this year with a 16% gain. This has caught the eye of investors who are looking to add more risk.
While the order books closed at about 10pm Hong Kong time the previous evening, the price wasn’t revealed until after the shares had been crossed at the opening of Indian trading on Friday, which enabled the bookrunners to deliver almost all the shares to the intended recipients. According to people involved in the trade, only 1.5% of the block was lost to parties not participating in the transaction — a very low portion for a deal of this size.
The need to cross blocks after the opening of trading — in an unprotected trade — is a quirk in the Indian market that sometimes enables other investors or traders to squeeze in at the other side of the trade (by placing buy orders at the exact placement price) and “steal” shares through the automatic matching that were originally allocated to other investors. This is a problem that puts a lot of additional pressure on the bookrunners when it comes to clearing the trade and there have been cases in the past when the bookrunner has lost as much as 45% of the stock to investors who weren’t supposed to get them.
In June, Citi ended up raising the placement price by Rs2 per share after noticing that there were orders for large chunks of shares at the placement price in the opening auction. After a quick discussion internally the bank decided that the buyers would probably be okay with paying two rupees more if it meant they got to keep more of their shares — which turned out be right. Citi still lost about 5% of that trade to unintended buyers.
This time it took a different approach and kept the price secret until after the shares had been crossed. To keep the market guessing, the price range was also deliberately very wide at launch, ranging from the preliminary closing price to as much as 10.45%.
The final price was fixed at Rs657.50, which translated into a 6.25% discount.
The block consisted of approximately 145.26 million shares, or just over 50 days of trading volume. They were offered at a price between Rs630 and Rs703.55, with the upper end of the price range being equal to Thursday’s preliminary closing price on the National Stock Exchange of India. The closing price was later adjusted to take into account the weighted trading price in the final 30 minutes of the trading day, which put it at Rs701.30 and the top end of the price range at a premium.
But given the size of the transaction, investors weren’t really expected to go for that end of the price range, so the adjustment didn’t really make much difference. That said, a source noted that a number of investors did come in at strike to ensure they would get allocated, knowing that the price wouldn’t be fixed at the top end anyway. This may have been a smart move given the huge interest in the deal.
In all, more than 100 investors submitted orders and the deal was said to have been between two to two-and-a-half times covered. The majority of the shares (one source estimated it to be about two-thirds) were allocated to foreign investors, which came primarily from Asia and the US. But the order book also included virtually all of the top domestic institutions. Big global long-only funds were said to have gotten priority in the allocation, but some large global hedge funds also featured prominently in the book. Several existing shareholders also participated.
Aside from the fact that HDFC is one of the top blue-chip names in India, the stock should become a lot more liquid following Citi’s sale — a combination that would have been highly attractive to investors who are looking for good ways to enter the buoyant Indian market. Aside from Citi, Carlyle also chose to reduce its stake in HDFC in early February, adding further to the free-float. The private equity firm raised $270 million from the sale of a 1.4% stake in what was the first major ECM transaction in India since July last year. In that respect it was also viewed as positive that Citi chose to sell its entire remaining stake in one go. If it had split it up, the remaining shares would likely have acted as an overhang on the share price.
Sure, HDFC isn’t cheap in comparison to other Indian financing companies, but most analysts say it is worth its lofty valuation (5.1 times book for the current fiscal year to March). According to Bloomberg data, 22 analysts have a “buy” on the stock and 19 rates it a “hold”, compared to just four who advise investors to sell. Hence, the chance to pick up the stock at a discount of more than 6% was viewed as an opportunity too good to be missed. Citi’s $236.5 million sell-down in June was priced at a 2.4% discount and Carlyle’s sale earlier this month came at a 3% discount.
HDFC has opened 2012 on a strong note, but it has lagged the overall market. Before Citi’s sell-down the share price was up 7.5% since the beginning of the year and 14.3% since its low point in November. It fell 4.3% to Rs670.95 on Friday after the deal was completed.
Citi first invested in HDFC in the 2005-2006 fiscal year and by mid-2006 it had accumulated a stake of 9.3% to become the company’s biggest shareholder. By the time of the June sell-down it held about 11.3%. While some media reports noted that Citi never managed to get much strategic benefits out of its investment in HDFC, it seems to have done okay financially. According to share price data on the NSE website, and adjusted for a five-for-one stock split in August last year, HDFC has risen about 195% since the end of June 2006.
The sale comes as Citi — like most other global banks — are trying to shore up its balance sheet to meet new capital requirements and to reduce their risk-weighted assets. Citi noted on the term sheet that the deal is part of its ongoing capital planning efforts.
Meanwhile, Dewan Housing, which counts Sequoia Capital, Caledonia Investment and the Government of Singapore Investment Corp among its shareholders, sold approximately 11.74 million new shares through a fixed-price QIP that was launched late Wednesday evening and completed before the Indian market opened on Thursday. The shares, which accounted for about 11.2% of the existing share capital, were sold at Rs255.50 each, which translated into a 1.8% discount versus Wednesday closing price of Rs260.25 and was virtually equal to the floor price at Rs255.48.
The discount was tight not just in absolute terms, but also relative to the recent gains. Since January 12, the share price has soared 46.5%.
Even so, this deal too was well subscribed, according to a source, which again confirms the return of investor appetite — and not just for the top blue chips.
About 15-20 investors were said to have come into the deal, including a few domestic mutual funds and life insurance companies. Several of the company’s major shareholders were also said to have participated to prevent their holdings from getting diluted. Foreign investors contributed almost $50 million of demand.
Investors like the company partly because of its strong market position — it specialises in smaller loans to low- and middle-income borrowers — and the fact that it is able to more than offset a higher cost structure with higher margins and very low levels of delinquencies. Dewan is currently trading at a discount to HDFC and LIC Housing Finance, but the gap is expected to narrow as India continues to grow, making this a good entry point for investors.
The deal was arranged by Enam, Motilal Oswal, Religare Capital Markets and Standard Chartered.