Cheung Kong Infrastructure Holdings (CKI) surprised the market with a top-up placement yesterday which, after being upsized by close to 10%, ended up raising about HK$3.41 billion ($438 million).
The deal comes only a few days after the Hong Kong-based infrastructure specialist made a non-binding takeover bid for Northumbrian Water in the UK, offering £4.65 per share in cash, or a total of £2.4 billion ($3.8 billion). The approach got an enthusiastic response in the market and CKI’s share price has gained 6.8% during the past four days to a new record high, even as the broader Hong Kong market tumbled 4.7% on Monday and Tuesday.
In that context, it is not surprising that the Li Ka-shing-controlled company is taking the opportunity to raise fresh capital — especially since it has said that it sees a lot of potential to expand through acquisitions, particularly in Europe. However, the last time CKI sold new equity was in 1996, so it is bound to have passed on a few similar market opportunities in the past.
In September last year, it raised $1 billion from the sale of perpetual hybrid securities, which for credit analysis purposes are treated as 50% equity and 50% debt by the rating agencies.
Last night’s deal, which accounted for 3.7% of the share capital and about 25% of the free-float, was initially launched at a size of $400 million, but was later upsized to about $438 million. The price was indicated in a range between HK$40.41 and HK$42.15, which translated into a discount of 3% to 7% versus yesterday’s close of HK$43.45.
It was fixed at the bottom of the range for the maximum 7% discount, which was no surprise in the light of the recent share price movements. With Cheung Kong (Holdings) controlling about 84.6% of the company, the stock is also not that liquid and, after the upsize, the deal accounted for more than 50 days’ worth of trading.
Low trading volumes tend to increase the risk for the bookrunners, but they can also boost the attraction of a placement as an opportunity for investors to get a meaningful exposure to the stock. According to sources, Goldman Sachs approached the company yesterday suggesting a deal, supposedly after seeing demand for the stock in the market. The offering hit the screens at about 5.30pm Hong Kong time.
About 60 to 70 investors were said to have participated in the transaction. Most of them were long-only type accounts, including large global funds that bought the stock because of the fundamental growth story. Since CKI acquired EDF’s UK electricity distribution business in August last year, the stock has undergone a rerating and analysts have also upgraded their earnings forecasts to take account of the enlarged business. At about $9.1 billion, the EDF acquisition was the largest ever Hong Kong investment into Europe and CKI’s share price has gained 53% during the past 12 months on the back of that deal.
The perception of CKI has also changed significantly. Having previously been viewed as a somewhat “boring” infrastructure operator with stable earnings and cash flow, the company is now regarded as one of the more exciting growth opportunities within the Cheung Kong group. Outside of Hong Kong and the UK, CKI also has investments in electricity, gas, water and toll roads in Australia, New Zealand, Canada and, of course, China.
The deal didn’t attract that many hedge funds, as they aren’t particularly fond of illiquid stocks, but there was some demand from momentum funds. About two-thirds of the deal was allocated to long-only accounts, though. The majority of the top-quality demand came from Asia and the US, while European investors were less visible, one source said.
The order book was kept open until 10pm Hong Kong time, giving US investors ample time to consider the deal.
Being a top-up placement, the deal was made up of existing shares that were sold by Cheung Kong. However, the parent company will subscribe to the same number of new shares at the same price to ensure all the proceeds will end up with CKI. As a result of the slight dilution, Cheung Kong’s stake in the company will fall slightly to about 81.5%.
Northumbrian Water confirmed CKI’s bid in a statement on Friday last week, and said its board has agreed to grant CKI a limited period to undertake due diligence. The UK company’s stock price has gained 6.8% since the takeover bid was confirmed and is up 10.1% since June 28, when CKI said it was in the preliminary stages of assessing a potential bid for the London-listed company, which, according to its website, supplies water to some 4.4 million people in the north and south of England. Yesterday’s close of 455.20 pence is still at a 2.1% discount to CKI’s cash bid of 465 pence per share.
Northumbria Water is being advised by Deutsche Bank, while CKI is said to be working with HSBC and Royal Bank of Canada.
CKI didn’t connect last night’s capital-raising with the bid for Northumbrian Water, saying only that the money will go towards general corporate purposes. However, there is no doubt that a bit of extra cash will come in handy.
The top-up placement was arranged on a sole basis by Goldman Sachs.