HK Government completes MTR 2 bake-offs

ABN AMRO and Morgan Stanley will be the final two banks to pitch, making an oral presentation to the government this morning (Friday).

The battle to win the two to three bookrunners slots for a roughly HK$15 billion ($1.9 billion) secondary offering of shares in the government-controlled train operator is shaping up to be one of the most competitively fought mandates of the year. On offer is the position of government adviser, for which BNP Paribas Peregrine and ING Barings have been shortlisted and global coordinator, for which nine other banks are in the running.

These nine comprise ABN AMRO, Bank of China International (BOCI), Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Merrill Lynch, Morgan Stanley and UBS Warburg. Most believe that winning will hinge on whether the government decides it wants or needs to rotate the mandate.

The initial $1.28 billion IPO was handled by Goldman, HSBC and UBSW in September last year. Because of its wide retail penetration in the Territory, HSBC remains clear favourite to retain one slot and Goldman has cleverly teamed up with the bank to bid as a consortium and improve its chances of remaining in the frame.

Observers say that the main wild card is BOCI, which also has retail distribution capabilities and a number of political advantages. The bank is also close to UBSW, which in turn is one of the lead managers for its parent's IPO, scheduled for the first quarter of 2002. Since there is the high likelihood of a clash with the MTR, however, this may push both slightly out of the frame.

Two other banks likely to believe they have a strong chance are Merrill Lynch and Morgan Stanley. The former won the booby prize advising the government last time round and would wish to upgrade its role this. Morgan Stanley, by contrast, is sure to feel that it deserves to be awarded its first piece of government business.

Prior to the submission of technical pitches last Saturday, most of the other shortlisted banks had believed that Morgan Stanley was not been included because of a conflict of interest with the Kowloon Canton Railway Corporation (KCRC), which is engaged in a long and established rivalry with MTR Corp.

Morgan Stanley and JPMorgan are currently advising KCRC on its bid for the fourth harbour crossing, submissions for which are due early this summer. Advisers to MTR Corp in its bid are Goldman and HSBC. The government's adviser is Salomon Smith Barney, which is clearly conflicted from MTR 2.

A Morgan Stanley or JPMorgan banker would almost certainly argue that there is no conflict with the advisory mandate for KCRC because the government has deliberately set in place a sequential timetable for the fourth harbour crossing, followed by the secondary share sale. Throughout the whole mandate process, the government is also said to have made it quite clear that it wants to be completely transparent and operate a level playing field.

For this reason, MTR officials have not been included on the selection board that will decide the bookrunners’ slots. So too, JPMorgan has not been shortlisted, because the government does not want to raise allegations of favouritism against Financial Secretary Anthony Leung, who recently stepped down as the bank's Asian chairman.

The counter argument, on the other hand, says that while the final decision will be the government's, officials are unlikely to pick houses that the MTR Corp would be uncomfortable working with. In the company's charter documents it further states that it does not want to engage financial advisers which also act as advisers to competitor firms.

A decision is expected within the next three weeks.

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