Gems TV IPO oversubscribed

The company's unique business model and strong growth potential underpins Singapore's fourth largest IPO this year.
The initial public offering by Gems TV Holdings proved to be as popular among institutional investors as the UK TV channels that sell its jewellery, allowing the company to fix the price towards the top of the offering range for a total deal size of S$308.6 million ($198 million).

The companyÆs unique business model, which combines the manufacturing of handcrafted coloured gemstone jewellery at two production facilities in Thailand with the operation of television home-shopping channels dedicated to the sale of that jewellery, as well as its status as a retail concept stock helped attract more that 120 investors to the Singapore offering. Together they ordered more than 12 times the amount of shares on offer, according to a source.

Credit Suisse acted as sole global coordinator and bookrunner for the institutional offering, with DBS and CIMB as sub-placement agents. DBS is also joint underwriter on the retail portion of the deal.

As a result of the strong demand, the price was fixed at S$1.08 per share, which was close to the top of the indicated S$0.95 to S$1.10 range. At that price, consensus syndicate estimates value the stock at 17.8 times projected earnings for the current fiscal year, which ends in June 2007. Thanks to an aggressive expansion plan that is expected to result in strong earnings growth from next year, the PE multiple for fiscal 2008 is only 10.4 times, however.

Given its specific focus on gemstones the company has no direct comparables, but investors were said to have been looking at US companies providing home shopping TV channels. Because of their different growth profiles, these trade on widely different earnings multiples, however, with Liberty-owned QVC trading at a calendar 2007 multiple in the high 20s, while InterActive Capital, which owns the Home Shopping Network, fetches a multiple in the high teens for the same year.

As a result, most investors were attracted to Gems TV not because of its valuation, but because of its high margin/high growth business and the near-term expansion of its TV sales business into the US and Germany. In the somewhat longer term it is also looking to move into China and Japan. The company believes that its scalable and low-cost business model can be readily replicated in overseas markets, and syndicate analysts appear to agree, projecting a compound annual growth rate of 50% plus in fiscal 2007 and 2008, based on current operating margins just above 30%.

The company expects to start broadcasting of its Gems TV programmes in the US via satellite-based DirecTV later this month, which will give it access to another 15 million potential customers. It has also recently signed a memorandum of understanding to supply jewellery to a German home shopping TV channel.

Meanwhile, the UK home shopping market, where the company is already well established with 18 hours of self-produced programming per day, is expected to grow from $67.7 billion in 2005 to $82.3 billion in 2007, according to UK-based market research firm Key Note Ltd. The US home shopping market is already worth about $190 billion. Gems TV also sells some of its products over the Internet, both through its own websites and through third-party sites, including eBay.

ôPart of its appeal is the low average selling price of about $120 and the company has a lot of repeat customers,ö says one observer. ôIf it has even half of the success in the US in terms of customer viewing versus orders received that it has in the UK, it will do very well.ö

Gems TV, which applies a reverse auction model for the sale on its TV channels, has seen its revenues grow to $137.6 million in fiscal 2006 from $14.3 million in fiscal 2004. In the same period its bottom line has turned from a modest loss of $200,000 in fiscal 2004 to a net profit of $5.3 million the following year and $28.8 million in the 12 months to June 2006.

People familiar with the marketing process say investors were quite slow to catch on to the offering but the one-on-one meetings with the management, which has more than 15 years experience within gemstone sourcing and manufacturing as well as within the home shopping industry, made a real difference. The demand ended up being particularly strong among US-based media funds that are familiar with the home shopping concept and among Singapore-based accounts, they say.

At least 40% of the offering was believed to have been placed with US investors, while another 40% or so went to Asia and 10%-15% to European accounts.

The company offered 285.8 million shares, or 27.7% of its enlarged share capital, of which 72% were new. The remainder was sold by five existing shareholders, including a company controlled by Dan Kogen, who is the founder of the groupÆs operations in Thailand, and non-executive director Steve Bennett, who founded its original UK subsidiary.

About 5% of the deal, or 14.3 million shares, has been earmarked for Singapore retail investors in a public offering that opened on Saturday and will run until Wednesday (November 8). Another two million shares have been set aside for employees, business associates and other related parties.

The rest was sold to institutional investors through a placement that closed at the end of last week.

The deal includes a 15% greenshoe that could boost the total proceeds to $227 million. Even before adding those extra shares, the offering is the fourth largest IPO in Singapore this year after Thai Beverage, which tops the tables with $866 million, Allco Commercial Reit and Banyan Tree.

Gems TV will start trading in Singapore on November 10.
¬ Haymarket Media Limited. All rights reserved.
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