Yet another high-profile initial public offering in Asia has been pulled as market conditions remain difficult and investors continue to be highly selective about where they put their money. India’s Reliance Communications on Friday evening said that it had decided not to proceed with the initial public offering and listing of its subsea cable unit as a business trust in Singapore.
It said it will “await supportive market conditions and easing of prevailing global uncertainties” before proceeding with the offering at an appropriate time in the future, so as to unlock the full value of the assets in a way that is in the best interest of its 2 million shareholders.
The IPO of the subsea cable assets — under the name of Global Telecommunications Infrastructure Trust (GTI Trust) — was aiming to raise between $700 million and $1 billion and was set to price after the close of US trading on Friday.
The withdrawal of the deal came after investors were told on Thursday morning that four sovereign wealth funds had decided to come into the transaction as anchor investors. According to sources, the funds included China Investment Corp (CIC) and Temasek Holdings, as well as two entities out of Qatar and Dubai. The funds had collectively agreed to invest about $250 million, or about 35% of the base deal at the bottom of the price range. However, the confirmation of their involvement failed to spark the momentum needed to attract enough additional demand from other investors.
One source said there was some incremental demand beyond the anchors, but the deal never gained the traction it needed for the order amount to get to where the bookrunners wanted it, even though it offered a dividend yield of up to 11.5%. One reason may have been that the confirmation came so late. The institutional bookbuilding had already been extended from the initial closing date on Monday last week, which had made investors nervous about the level of demand and hence less inclined to commit some of their own money.
In that respect one can definitely question why the bookrunners chose to launch the deal before they had firm commitments in place from the sovereign wealth funds and any other anchor accounts. Had they waited, it is possible that investors may have had more confidence in the deal from the start. Contrary to most other recent IPOs in Asia, GTI Trust didn't have any cornerstone investors lined up before launch.
There were comments over the weekend that the bookrunners may have painted too rosy a picture for Reliance with regard to the potential demand — some say there was talk of $400 million to $500 million of indicated orders — making the company push ahead with the deal somewhat prematurely. Deutsche Bank is understood to have taken a leading role in the transaction, although all four banks were mandated as joint global coordinators and bookrunners. The other three banks were DBS, ICBC International and Standard Chartered.
But there were also other issues at play that may have kept investors on the sidelines, including an inherent scepticism about the sponsor. As a unit of Reliance Communications, GTI Trust would be backed by Anil Ambani, whose previous share sales in various group entities don’t have the best track record. There are also concerns about the corporate governance of the group. On top of that, Reliance was to have used the money raised from injecting its cable assets into GTI Trust to pay down debts that stood at $6.5 billion at the end of March. In other words, none of the money raised in the IPO would be going to GTI Trust itself.
Telecom infrastructure is also a new asset class among the Singapore business trusts, which means investors may have required a bit more time to get their heads around the industry issues. Notably, the subsea cable industry is suffering from overcapacity following the huge build-out of global and regional networks in the late 1990s and on certain routes prices for data transmission are still falling by about 20% per year, according to GTI Trust’s draft prospectus. The trust is currently only using about 25% of its installed capacity.
Even so, investors generally liked the assets, which include four wholly-owned subsea cable systems with a total installed capacity of 15,160 gigabits per second as well as an exclusive right to purchase capacity on a fifth cable system. The systems operate on six of the eight major global data traffic routes, which accounted for 63% of the global data demand in 2011. GTI Trust’s market share was about 18.8%.
The trust was also offering an attractive yield of between 9.5% to 11.5% for the fiscal year to March 2013 and an even higher yield of 10.1% to 12.2% for the following year. Double-digit yields are a rarity among Singapore-listed business trusts and Reits, which tend to trade mostly at yields between 5% and 10%. That said, some investors questioned whether GTI Trust will be able to deliver on its earnings projections, given the continuing drop in data transfer prices.
GTI Trust was looking to sell between 55% and 65% of its total number of units at a price between $1.09 and $1.32 each. The base deal comprised up to 758 million units, but there was also a 15% greenshoe that could have increase the free-float to a maximum of 75% and the total proceeds to about $1.15 billion. The rest of the units were to be retained by Reliance Communications.
As Reliance needed the money to deal with its debt burden, the cancellation of the IPO is likely to be viewed quite negatively. And sources said on Friday that they expect the company’s share price to take a beating today. The stock fell 7.1% during GTI Trust’s extended two-week roadshow and is down 40% from its 2012 high in February.