Could Sony Financial re-open JapanÆs IPO market?

JPMorgan and Nomura pull off an unlikely coup as Sony's insurance unit raises $3 billion in a deal that could stimulate JapanÆs stagnant IPO market.
The listing of Sony CorporationÆs insurance unit has surprised its detractors, pricing at the top of its Ñ380,000-Ñ400,000 ($3,281-$3,453) range earlier this week. The price represents a 5%-8% premium (depending on which valuation method is used) to the only other listed Japanese life insurance company, T&D Holdings.

A total of 800,000 shares in Sony Financial were sold, of which 75,000 were new. After the 70,000 share greenshoe is exercised, Sony will have sold a full 40% of its subsidiary. It will retain the other 60%.

JPMorgan and Nomura Securities were joint global coordinators and bookrunners on both the international and domestic tranches.

ôIt was a combination of factors. The deal benefited from the bounce in the Japanese stockmarket, and SonyÆs brand also helped amongst Japanese retail investors," says a source. "It also helped that almost 90% of foreign institutional investors estimated that it was a better company than T&D."

Not pricing at the top of the range would have been a serious loss of face in Japan, where very few deals get downgraded.

ItÆs certainly a surprising turnaround. When it became apparent several weeks ago that Sony would go ahead with plans to spin off its life insurance, non-life insurance and internet banking unit, many observers were sceptical about the dealÆs chances of success. Initial discussions on the IPO coincided with the US subprime crisis, which barely a month ago appeared to be heading towards a full-blown credit crunch across all major international markets.

The Nikkei 225 index mirrored the panic, dropping from 18,171 points at the beginning of July to a year-low of 15,273 points in mid-August. The index recovered at the end of August, before slumping again at the beginning of September - the week bookbuilding started. (The bookbuild process started on September 6 and finished on September 29. As is common in Japan, the bookbuild began without an initial price range.)

Giving the deal a crucial boost was the fact that the US Federal Reserve slashed the Fed Fund rate by an unexpectedly large 50 basis points on September 18. The price range for the deal was set some 12 hours before that decision, which helped stall the steep falls in markets across the world.

Since its three-month low in mid-August just north of 15,000 points, the index has recovered strongly to around the 17,200 point mark currently û although still noticeably shy of its pre-summer highs.

Thanks to SonyÆs strong brand appeal, and on the back of investor optimism after the market upswing from August onwards, the roadshow encompassed more than 160 one-on-one meetings with international institutional investors and another 100 international institutional investors who were met in group meetings.

Demand for the international tranche, which comprised 37.5% of the total, came primarily from the US, followed by Asia.

ôWhen the process of wooing investors started, they were extremely cautious. Frankly, if the markets had not rallied in the second week of the bookbuild, I donÆt think this deal could have gone ahead,ö says one specialist.

However, investors reportedly liked the life insurance unit's above market growth, its strong distribution and solid sales force, and the low lapse rate of its policies. In the second unit, non-life, investors were attracted to the fact that private medical insurance is growing rapidly (given the governmentÆs financing crunch) and Sony's commanding position in car insurance. The internet bank also has amongst the highest levels of deposits per customer. However, both these latter business represent barely more than 10% of the groupÆs revenues.

ôThe growth prospects for the life insurance business are held up by JapanÆs weak demographics,ö notes one investor, ôbut the other units are growing strongly.ö

Final demand saw the international book oversubscribed by seven times and the domestic book oversubscribed by two times, according to one investor's estimate. This may not seem much by Hong Kong standards, but ôit was a very large dealö points out one specialist. Indeed, the deal is the largest IPO since the $3.2 billion IPO of Aozora Bank last year. ItÆs also the biggest divestment, or carve-out, since that of NTT in 1998.

Aozora Bank also came up in conversations with market sources for another reason: the IPO encountered problems in the after-market and is still trading at a substantial discount to its IPO price. The current share price is around Ñ368 compared to around Ñ502 at IPO.

ôThe key was not to be over-aggressive in pricing Sony Financial,ö says one specialist. ôNobody wanted the offering to go the same way as Aozora Bank.ö

There has been speculation in some media that the range of Ñ380,000 to Ñ400,000 was a downsizing of an earlier range, based on the Ñ415,000 figure that was in the Japanese version of the prospectus.

However, market sources strenuously deny this, adding that the figure in the prospectus is a legal requirement so that local retail investors can get some idea of the companyÆs capitalisation. The figure was not included in the international prospectus.

ôThere is absolutely no requirement for that figure to be part of a range during the bookbuilding stage,ö says one specialist.

The key question is whether this deal will kick off the stagnant IPO market in Japan. Investors and bankers wonÆt know till one week from today (October 11) when the deal starts trading in Tokyo.

ôIf the deal does trade well, the necessity of bringing in international investors will have been made clear,ö notes one source, adding that international investors are the only way to build price tension in Japanese offerings. Japanese investors have indeed been sluggish buyers in their own stockmarket, preferring to buy high-yielding currencies such as the Kiwi dollar.

Part of the reason for bringing in international demand was that there was some concern that the highly technical analysis needed for valuing insurance companies might put off retail investors. Of the 62.5% of shares sold within Japan, 50% went to retail accounts while just 12% went to institutional clients. The international portion comprised 37.5% of the offering - a relatively standard breakdown for a deal this size, according to market sources.

Japanese IPOs have not performed well this year, contributing to lacklustre fresh demand. One specialist estimates that IPOs worth over $100 million have traded down by a æmedian 20%Æ. And according to the JCN Network, a Japanese financial wire, there have been just 89 Japanese IPOs for the first eight months of this year, compared to 112 for the same period last year. Here's hoping Sony Financial will improve that trend.
¬ Haymarket Media Limited. All rights reserved.
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