Syndicates kicked-off formal roadshows for WH Group's looming share sale, which is set to rank as Asia’s largest initial public offering in four years and could yet raise more than $6 billion.
Some 3.65 billion shares will be offered on April 22 at between HK$8 and HK$11.25, with 80% consisting of new shares and the remainder being sold by the Henan-based pork producer’s existing shareholders, including Goldman Sachs, Temasek, CDH Investments and New Horizons.
There is also a greenshoe option that could be exercised in the event of strong demand and boost the number of shares on offer by a further 15%, according to the term sheets seen by FinanceAsia. The tranche split will be 95% institutional and 5% retail, with the retail portion subject to a clawback. There are no cornerstone investors.
The total deal size is estimated at between $3.77 billion and $5.3 billion. If the greenshoe option and an upsize option is exercised, WH Group's IPO could fetch over $6 billion.
The price range represents 15-20.8 times 2014 forecast earnings, people familiar with the deal said.
Following a week of pre-marketing, the roadshow began in Hong Kong on Thursday and will shift to London and Boston next week before concluding in New York on April 22.
In addition to being the largest IPO in Asia since AIA Group raised $20 billion in 2010, WH Group has turned heads due to its enormous syndicate, which includes seven sponsors and 15 global coordinators. Sponsors are Bank of China International, CITIC Securities, DBS Vickers, Goldman Sachs, Morgan Stanley, Standard Chartered and UBS.
Joint global co-ordinators are Bank of America Merrill Lynch, Barclays, CICC, Credit Suisse, Deutsche Bank, ICBC International, JP Morgan and Rabobank.
Gauging investor interest
Long-only investors appear keen on WH Group’s fundamentals and underlying story. It is the world’s largest pork producer and is in a strong position to benefit from consumer market trends in China, which is expected to account for the majority of the world’s pork consumption growth over the next few years. The company’s acquisition of US pork producer Smithfield Foods last year is also viewed by investors as a prudent move since it will allow the company to source US pork directly.
But investors maintain some pricing power – the Chinese pork producer needs the cash to pay off the debt it took on when it purchased Smithfields in 2013 for $7.1 billion including debt. This puts its debt-to-equity ratio at 286% as of year-end 2013.
The company formerly known as Shuanghui International will use the proceeds to reduce its debt load by $4.5 billion. This includes repaying a $4 billion three-year syndicated loan, $389 million in unsecured senior notes and $158 million of Smithfield’s inventory revolver, sources say. The three-year syndicated loan matures on August 30, 2016, and has an interest rate of Libor plus 3.5%.
A renewed interest in Chinese equities may also help boost WH Group's share price. Investors, concluding that fears of a credit crisis were overblown, have returned to Chinese stocks. After hitting a 2014 low on March 20, the Hang Seng China Enterprises Index ETF has jumped 13%.
Shanghai-based CDH Group – one of China’s largest private equity firms – is WH Group's largest shareholder currently, owning 33.7% of the company.
Where are the comparables trading?
WH Group’s Chinese pork operations, Shenzhen-listed Henan Shuanghui Investment and Development, is currently trading at a forward p/e of 18.89 times, while its European packaged meat business, held by Spain-listed Campofrio Food Group, is trading at around 21.44 times earnings, according to Bloomberg.
Smithfield was trading at about 13.2 times estimated 2014 earnings at the time of its de-listing last autumn.
Another Chinese pork producer, Huisheng International, raised $31.7 million in February when it listed in Hong Kong. The deal was massively popular with retail investors – the retail book was oversubscribed 2,000 times. But its share price performance since then has disappointed, having slipped 14%.
Bankers say Huisheng is too small to compare to WH Group and instead point to Chinese snack food giants Tingyi Holdings and Want Want Holdings. Both are trading at high forward p/e earnings – Tingyi at 29.93 and Want Want at 27.67 – reflecting the strong investor interest in China's burgeoning consumer story.
Selling points and risks
Demand for pork in China is unquestioned. It is by far the country's most popular meat.
The Chinese consumed roughly 480 kcal of meat per person per day in 2012, with pork alone accounting for 350 kcal of this, according to HSBC.
The UK-based bank estimates that China will account for 79.8% of global pork consumption in 2014, rising to 85.37% in 2015.
In addition to benefiting from huge and increasing Chinese pork consumption, the company has effectively hedged itself against hog price volatility. Rising hog prices are good for the US production arm but not for the Chinese consumption unit. The Smithfield acquisition has given the company the power to balance global supply and demand as it now dominates both ends of the chain.
China's historical supply/demand gap in China will likely continue – the company forecasts pork consumption will grow at a slightly faster rate of 3.08% this year compared to 3.01% for production – leading to more imports into China.
Government initiatives to improve efficiency and raise quality standards in order to improve margins and mitigate food scandals should also benefit WH Group. These moves have so far led to a slump in the number of slaughterhouses in China to 9,989 in 2013 from 28,560 in 2008. The government is looking to cut capacity by another 50% in the next two years.
However, events in 2013 underline the risks to the business. Rising feed costs, US-government imposed restrictions and the porcine epidemic diarrhoea virus (PEDV) all hit the industry last year. It hurt Smithfield’s net profit, which dropped to $184 million in 2013 from $521 million in 2011.
The porcine virus remains an unknown quantity. WH Group cautioned in its prospectus that the virus could lead to adverse affects on its business and finances in upcoming months.
The company is also vulnerable to any fresh Chinese food scandals, such as the Jiapingtang River incident last March, when 16,000 dead pigs were dumped into the river.