E-House sells new shares at 8% discount

An existing shareholder withdraws plan to participate in the sale, resulting in a base deal size of $102 million.
New York-listed E-House (China) Holdings has completed its follow-on share offering, raising $102 million. However, one of the companyÆs independent directors who had also been scheduled to sell shares, decided not to participate in the transaction after the share price dropped 7.8% during marketing. This reduced the base deal size to 6 million shares from 7 million.

The company also had to accept to sell the shares at an 8% discount to the latest closing price as investors are currently highly price sensitive. Chinese stocks that are listed in the US have become especially volatile and investors û in the words of one observer û ôdonÆt know from one day to another whether they will be up or downö.

The market is also highly news-driven at the moment and during the roadshow investors had to digest another rate cut by the Federal Reserve as well as a subprime-related ratings downgrade of one of the largest bond insurers in the US. There is also a bit of an overhang on the E-House stock as the lockup for certain directors and shareholders who owned shares at the time of the initial public offering in August last year will expire today, opening the possibility that more shares could trickle into the market.

All this makes the chosen timing of the sale somewhat odd, but a source close to the company says the E-House management feels there are good opportunities for the company to lock in more contracts with big property developers while the property market remains volatile, because it is at times like these that developers tend to choose to outsource their marketing efforts.

The majority of the money raised from the share sale, or just over 60%, will be used to secure strategic alliances, which typically require some upfront payments, and for possible acquisitions of complementary businesses. About 20% will be used to expand its sales and marketing efforts and to invest in its information and operational systems, while the rest will go towards general corporate purposes.

ôDevelopers try to use in-house marketing whenever possible to limit the costs, but when the property market gets more difficult they need a more aggressive team to keep up the sales and then they turn to professional real estate services companies like E-House. In that sense, its business is almost counter-cyclical,ö the source says.

The real estate services industry has grown substantially in recent years with revenues and the gross floor area sold by professional agents increasing from approximately Rmb500 billion and 85 million sqm in 2004 to Rmb1 trillion ($133.5 billion) and 150 million sqm in 2006. During the same period, the number of real estate services companies grew from about 16,000 to 18,000.
E-House has been ranked as the largest real estate agency and consulting services company in China in 2004, 2005 and 2006 by the China Real Estate Top 10 Committee, based on geographic coverage, the number of transactions, and the transaction value and GFA of the properties sold.

The company sold approximately 7.7 million sqm of primary properties with a transaction value of approximately Rmb61.8 billion ($8.2 billion) from 2001 to September 30, 2007, for real estate development projects in 33 Chinese cities. It operates through an extensive network of over 3,000 real estate sales professionals.

From the outcome of the transaction, it seems the company may have been right when it comes to the timing as it was able to attract enough investors to comfortably cover the deal. The share price also fell relatively less during the marketing period than the decline experienced by other Asian companies that have sold stock in the US market recently and the discount was tighter than the 9.8% that was achieved by solar wafer manufacturer Renesola on its first sale of American depositary shares the previous week.

ôInvestors are still willing to buy growth companies and to help fund their expansion,ö notes one observer, adding that the company has also û so far - delivered on its plans and promises.

However, a good portion of the demand came from existing shareholders, suggesting they may have wished to avoid dilution of their current holdings. Most of the buyers were US-based. Credit Suisse and Merrill Lynch, which took the company public last year, were joint bookrunners.

E-House sold 6 million new ADS at a price of $17 apiece, which compared with a closing price of $18.48 on Thursday. There price was fixed before the New York market opened on Friday. The share price dipped 3.95% in early trading Friday, but rebounded strongly in the second half of the session and closed up 2.2% at $18.88. The rebound came as the broader market edged higher following MicrosoftÆs bid for Yahoo. The $44.6 billion offer, which represented a 62% premium to the market price, was taken as a sign that US stocks are beginning to look cheap.

According to an E-House filing to the regulators on January 25, independent director Neil Shen was planning to sell 1 million existing shares, but that portion of the offering was withdrawn before pricing. The deal does include a 15% greenshoe that is made up of all existing shares, however. Those shares will be sold by Jun Heng Investment, an investment company that is controlled by E-House Chairman Xin Zhou and counts several other company directors and executives among its shareholders.

Before the share sale, E-House was up 34% from its IPO price of $13.80, but had almost halved from the high of $36.45, which it reached in late October. The company raised $201 million from the IPO, which was completed in the middle of the subprime crisis.
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