Esprit completes placement

Market absorbs fifth and largest placement in the space of one-and-a-half years.

A HK$4.092 billion ($525 million) placement in Hong Kong listed clothing group Esprit was completed yesterday (November 10). The deal represents the fifth placement in the group since May 2003 and a further 8.1% divestment by chairman Michael Ying.

Under the lead management of Citigroup, a 97.2 million share deal was priced at HK$42.10. This equates to a 6% discount to the stock's HK$44 close on Tuesday when it was suspended and the outer end of a 2.9% to 6% range.

The relatively generous discount is not that surprising given how much larger the new block is relative to past sales and the group's stock price performance. The last two blocks, for example, were completed at discounts of 3.4% and 3.7%.

The large size of the deal also means that it equates a fairly hefty 44 days trading volume and will expand the freefloat by 19.7%. Pre deal, Esprit had a freefloat of 41%, while the chairmen held a further 31%.

Analysts conclude that the deal will weigh heavily on the stock price when it begins trading again today, but believe continuing share price performance will outweight this over the longer term.

Year-to-date Esprit is up 73.31% and has risen 12% since the beginning of November. It is currently trading at an all time high and is valued at around 16 to 20 times 2005 earnings (according to a selection of analysts reports). Some analysts believe near-term upside may be limited.

The group has just reported strong full year financials (end June), with net income rising 55.44% year-on-year to HK$2 billion ($256 million). Because 84% of revenues are derived from Europe, but accounts are prepared in Hong Kong dollars, the stock has benefited from the continuing weakness of the US dollar relative to the Euro. Indeed, analysts calculate that every 1% swing in the currency has a 0.7% effect on earnings.

Specialists also say that the stock is gaining a strong institutional following and does not attract much hedge fund interest. The current deal is said to have closed about 1.3 times covered with participation from about 60 accounts, of which about 10 were completely new to the group.

About 50% comprised global accounts, 25% Asian and 25% European.

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