Controlling shareholder sells small block in Yue Yuen

The Tsai family raises $48 million at a 6.75% discount, but triggers a sell-off in the market that leaves other shareholders with a 13.3% loss on the day.

On Friday, the controlling shareholder in athletic shoemaker Yue Yuen Industrial, the Tsai family, took advantage of a sharp rally in the company's share price earlier in the week to raise HK$373 million ($48 million) by selling a small portion of its holdings. The sale was completed during the lunchtime break and, while sources say the shares were fully placed with more than 20 investors, the share price tumbled in the afternoon, finishing 13.3% down on the day and 3.8% below the placement price.

Such a sharp sell-off could be an indication that the shares were either not distributed in full -- indeed that was the speculation in the market on Friday afternoon -- or that a majority of the shares were placed with short-term investors who chose to sell immediately to make use of the placement discount to book a quick profit. The latter may be more difficult to control when the placement is launched and completed during the lunchtime break as the bookrunners have a limited time to build the book before trading resumes. Renhe Commercial Holdings suffered a similar fate when three existing shareholders chose to cash in part of their holdings a couple of weeks ago, also during the lunchtime break on a Friday. Renhe's shares price dropped 11% in afternoon trading after the sale and finished the day 2.9% below the placement price.

But sources close to the Yue Yuen transaction say the offering was well oversubscribed and placed with a combination of long-only investors, hedge funds and private wealth accounts. The buyers included both existing and new investors in the company.

One explanation for the share price tumble was that there were already a couple of large institutional sellers of Yue Yuen stock in the market before the placement, and when they saw that the controlling shareholder was selling, they got more aggressive. Indeed, it is not uncommon for investors to get nervous when key shareholders are selling -- especially on the back of a strong run-up -- as it tends to raise questions of whether the seller is anticipating that the share price is nearing the peak. And that goes even if the sale, as in the case of Yue Yuen, represents only a small portion of their holdings.

The block in the market on Friday was offered by Quicksilver Profits, which is one of the Tsai family's investment vehicles, and comprised 20 million shares, or 1.2% of the company. As a result of the transaction, the Tsai family's holdings will fall marginally to about 59.5% from 60.7%.

The shares were offered in a range between HK$18.65 and HK$19.20, representing a discount of 4% to 6.75% versus the midday close of HK$20. Not surprisingly, given that the sale had to be completed in about 45 minutes, the price was fixed at the bottom for the maximum 6.75% discount. This was still at the tight end of where the recent Hong Kong placements have priced, but as Yue Yuen's share price was already down in the morning session, the discount versus the previous day's close was significantly wider at 9.9%.

Morgan Stanley was the sole bookrunner for the offering. The US investment bank has been very active since the beginning of this month, having arranged no fewer than seven equity trades. Several of those have been sell-downs below $100 million, including deals in sportswear designer and retailer China Dongxiang, China Resources Gas together with Credit Suisse (the seller in both of these were Morgan Stanley entities) and the earlier mentioned Renhe trade.

But Morgan Stanley has also helped a couple of companies to recapitalise through the sale of new shares. Together with J.P. Morgan it arranged a $240 million top-up placement for China's Shimao Property and on Thursday last week it was one of three bookrunners that arranged a $325 million qualified institutional placement (QIP) for Indian real estate company Unitech. The Unitech deal was extremely well received in the market as analysts say the cash infusion is expected to reduce the financial strain on the company and the share price rallied 22% on Friday. IDFC-SSKI and UBS were joint bookrunners on the Unitech trade.

UBS too has had a busy month, arranging four deals since March 27, including two exits for private equity fund H&Q Asia-Pacific in Korea and a separate sell-down in Renhe, which it did together with BOC International.

Sell-downs have been a major theme lately, especially in Hong Kong, as existing shareholders are making use of the rebound in the local market to realise a bit of cash. The Tsai family's sale in Yue Yuen was a case in point. The 16.7% gain in the share price between Tuesday and Thursday last week left the stock 68.8% above its lows in mid-November last year and on par with where it traded in October, making this a tempting time to take a bit of profit. And many other long-term shareholders of Hong Kong-listed stock are finding themselves in similar positions after the Hang Seng Index has gained 37.5% since its 2009 low on March 9. This is why bankers expect sell-downs to remain a key ECM activity in the months ahead.

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