It wasn’t exactly the smoothest of executions. In fact, Cheung Kong Infrastructure’s top-up placement is likely to be remembered as one of the messiest ECM deals in quite a while after the company announced an acquisition in the middle of it.
In light of the announcement, which was published on the Hong Kong stock exchange website just before 8am yesterday morning, CKI’s shares was suspended for the entire day while investors tried to get their heads around what was going on.
But after the initial confusion, and after investors were given a chance to reconfirm their orders, the bookrunners were eventually able to wrap up the placement last night. Investors had already been told early yesterday morning that there was price sensitivity towards the bottom of the range and after yesterday’s events it was no surprise that the price was fixed right at the bottom at HK$46.15 per share for a 6.3% discount to the latest close. The upsize option wasn’t exercised so the total deal size was capped at HK$2.31 billion ($297 million).
According to a source, a small number of investors did drop out, but there were also new orders that came in and some of the original investors increased the size of their orders. When the books closed for the second time at 10pm last night, the deal was slightly oversubscribed.
While the way the latest acquisition was announced was clearly not ultimate, it seems investors were still pleased that the Li Ka-shing-controlled infrastructure company is continuing to expand its portfolio with yet another acquisition. This latest top-up placement was CKI’s third equity sale in just 12 months and some investors were keen for the company not just to put the money in a pile but to do something with it. The first equity fundraising in July last year came just a few days after CKI made a bid for UK-based Northumbrian Water, but since then it had announced no new acquisitions.
As of the end of June, the company had more than HK$8 billion ($1 billion) of cash on hand, it said in its six-month earnings report last week. Together with a gearing ratio of 7%, this put it in a “very strong position for further acquisitions,” chairman Victor Li noted. And he added that “a challenging economic landscape may create opportunities [as] acquisition prospects for quality assets often arise during periods of instability”.
Investors probably didn’t think the next deal was quite as imminent as it turned out to be, though.
As it happened, the company and its three partners signed an agreement to acquire Wales & West Utilities, a gas distribution network in the UK, for £645 million ($1 billion), just after midnight on Tuesday. Cheung Kong (Holdings), Power Assets and CKI, which are all part of the Cheung Kong group, will each hold 30% of the investment, while Li Ka Shing Foundation will hold 10%.
CKI alerted the placement bookrunners (BOC International and HSBC) shortly afterwards. The two banks had closed the books at midnight and although the deal was said to have been covered and could have been priced and allocated there and then, they made the decision to delay in order to allow investors to digest the new information. Since the acquisition hadn’t yet been publicly announced, they couldn’t inform investors straight away, however, and hence the reason why they went out with a message saying that the deal was covered but wouldn’t be allocated until just before the opening of Hong Kong trading yesterday.
Of course that didn’t happen. CKI announced the acquisition just before 8am and the bookrunners then spent most of yesterday trying to help investors understand the acquisition to the extent that they were still comfortable to invest. In addition to allowing the initial investors to reconfirm their orders, they also re-opened the order books for any potential new investors.
The launch of a new equity issue just before the signing of an acquisition agreement does look odd, to say the least, but a spokesperson for the Cheung Kong group said yesterday that the two exercises were totally unrelated and when it chose to do the placement after the close of trading on Tuesday, CKI didn’t know that the acquisition agreement would be so imminent. While one can argue that perhaps the company should have alerted potential investors that it was in negotiations, M&A bankers said yesterday that companies may well be involved in several negotiations at any given time and often don’t know when they will reach the final stage. Indeed, many of them may never close.
According to sources, CKI had taken advise from its lawyers that the ongoing negotiations weren’t material enough to have to be disclosed, and therefore would have answered no when HSBC and BOCI asked the usual due diligence questions related to whether the company was aware of any material information not yet public. And it seems market participants yesterday were prepared to give CKI the benefit of the doubt that it really wasn’t aware that the acquisition would be agreed so soon.
Correct or not, the incident made a mess of the placement.
Still, some 24 hours later than planned, the deal was eventually priced and allocated around midnight last night. By that time, the order book contained orders from more than 50 investors. A bit more than half of the demand came from long-only funds, and as usual when it comes to CKI, there was strong support from existing shareholders. Asia accounted for the majority of the interest, but there were also orders both from Europe and the US.
As reported yesterday, CKI was offering 50 million shares at a price between HK$46.15 and HK$47.62, which translated into a discount of 3.3% to 6.3% versus Tuesday’s close of HK$49.25. There was also an upsize option of 16 million shares, but since that wasn’t exercised the size of the offering was capped at 2% of the existing share capital.
As a result of the deal, CKI’s free-float will increase to 23.4% from 21.8%, according to Bloomberg data.
The placement came on the back of a 16.2% rally in the share price since the end of May, which pushed the stock to a new 52-week high on Tuesday. However, before the recent rally, the stock had been coming down with the rest of the market as investors worried both about the eurozone crisis and global growth. Hence, the latest share price was really only 2.6% above the level where it traded before CKI’s previous placement in March.
Meanwhile, CKI’s group managing director, H L Kam, said in a statement that the company’s acquisition of Northumbrian Water last year and UK Power Networks in October 2010 were among the key drivers of the its profit growth in the first half of this year. “We are pleased to have the opportunity to acquire another high-quality asset, which is poised to extend our growth momentum and generate recurring profit contributions similar to that of our other infrastructure projects,” he added.
Wales & West is one of the eight major gas distribution networks in the UK. It services a population of about 7.4 million in Wales and the Southwest of England and owns some 35,000 kilometres of pipeline and 18 gas storage sites.
CKI and its three partners said they will jointly take on £1.312 billion of net debt in connection with the acquisition, giving Wales & West an estimated enterprise value of £1.793 billion ($2.8 billion). The consortium is being advised by Nomura, which is also expected to provide some of the financing for the transaction. The acquisition is expected to be completed by the end of September.