citic-1616-prices-ipo-at-the-top

Citic 1616 prices IPO at the top

The Citic Pacific telecom spin-off raises $270 million from its Hong Kong listing.
Citic 1616 Holdings has attracted significant demand for its initial public offering, allowing it to raise the maximum HK$2.11 billion ($270 million) it sought. It priced the deal at the top of the indicative range of HK$2.13 to HK$2.58.

The company, which provides connectivity between voice and data service providers in Hong Kong/China and telecom operators in about 50 other countries, timed its roadshow well as it coincided with the Hong Kong market regaining upside momentum after the earlier correction. Between the launch of the roadshow last Monday (March 19) and the pricing in the early hours of yesterday morning, the Hang Seng Index gained 4%.

According to sources, the institutional tranche attracted more than 300 orders with a combined value of more than $10 billion, and retail investors were even more aggressive. The 10% tranche set aside for retail buyers drew more than HK$189 billion ($24.2 billion) worth of demand and was over 900 times covered, triggering a full claw-back that increased the size of the retail offering to 50% of the total.

After adjusting for that clawback and the 6.9% of the deal sold to current shareholders of Citic Pacific through a preferential offer, the institutional book was approximately 100 times subscribed. This means most investors will be far from receiving a meaningful allocation. There was no price sensitivity in the book, and the conversion ratio from the roadshow was nearly 100%, the sources say.

ôAround the world, as far as telecommunication markets are concerned, only those in emerging Asian countries are still enjoying double-digit growth. Investors are probably attracted by the growth potential of the telecommunication industry in China,ö notes an observer close to the deal.

The final price values Citic 1616 at 26.7 times its 2006 earnings, which is fairly generous compared with the price-earnings ratios of some other telecom-related stocks listed in Hong Kong. China Communications Services, which supplies infrastructure for the kind software services that Citic 1616 provides, trades at 38 times its 2006 earnings, while value added mobile services provider, Tencent, trades at a 2006 P/E multiple of 42 times.

ôThe P/E of China Communications Services is higher, (but) it was probably not suitable for the bookrunner to set the price range at that high a level since the market tumbled two weeks before the IPO launch,ö sources say.

ôCitic 1616 deserves a high valuation as its business faces less competition. It will benefit from more operators entering the market, while being free from the risks and increasing competition that telecom operators face at the momentö, says an analyst keeping an eye on the deal.

Citic 1616 sold 815.9 million shares, or 43.4% of its share capital. If the 15% greenshoe is exercised as well, the deal size could increase to as much as HK$2.42 billion ($310 million). BNP Paribas was the sole sponsor and bookrunner of the deal.

Only 23% of the shares were new, which means the company wonÆt be reaping much fresh capital from the IPO. Of the net proceeds it does receive, HK$240 million ($31 million) will be used to expand its technological applications or geographical network coverage, potentially through acquisitions or joint ventures, according to the listing document. Another $100 million will go towards upgrading the companyÆs computer software and hardware and $90 million will be spent on development activities, including the hiring of new staff.

The other 77% of the shares on offer were sold by Citic Pacific, whose stakes will fall from 100% to 50.6% as a result of the IPO, or to 50.1% if the greenshoe is exercised in full. Citic Pacific is a conglomerate ultimately controlled by the Chinese government whose businesses range from manufacturing of specialty steel to property development and infrastructure, including power generation, aviation and communications.

Hong Kong-listed Citic Pacific bought the company in 2000 and transformed it from a simple provider of international voice calls to the independent telecom hub operator it is today. By using the company as a ômiddle manö, telecom operators are able to reduce costs and establish instant connectivity with the about 240 other operators that are Citic 1616 customers, allowing them to focus their resources on other areas such as expanding their business and customer base.
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