HKBN is set to raise HK$5.8 billion ($748 million) from an initial public offering after pricing its shares at the top end of the marketed range, making it Hong Kong’s largest flotation so far this year.
Strong demand will allow investors, including private equity firm CVC, Singapore sovereign wealth fund GIC and US buyout shop Carlyle, to sell a total of 644.9 million shares at HK$9 each, the top of the indicative HK$8 to HK$9 per share range.
The IPO values the company at HK$9 billion. No new shares were offered in the sale.
Pre-greenshoe, CVC will see its stake in Hong Kong's second-largest broadband provider drop to 14.4% from 68.4%, while GIC's shareholding will dip to 9.9% from 10.9%. The company's CEO, William Yeung, saw his stake drop to 2.55% from 3.2%. Sources say Yeung made roughly $7 million from the IPO.
Canada Pension Plan Investment came in as the deal’s sole cornerstone investor, pledging $200 million.
“From the get-go, we had large demand in the anchor book. There were lots of high quality long-only [firms] and tech specialists coming out across the range,” one source close to the deal told FinanceAsia. The book was covered by anchor orders on the first day of book building, sources said.
Allocations were still being sorted out on Thursday in Hong Kong, but sources close to the deal told FinanceAsia the institutional book was multiple times covered at the top of the range.
The demand nudged the price up, allowing the issuer and syndicate to stick with the HK$9 figure when books closed on Thursday morning in Hong Kong. “The book naturally moved [to HK$9]. That’s why we felt comfortable multiple times covered at the time,” the source said.
“There were some [large investors] in the US and UK that came into this trade that you don’t usually see in Hong Kong,” the source said. “[HKBN] has much better growth than HKT Trust. And the reality is, if you are a tech specialist fund, you don’t have that big of a universe. They liked the growth story.”
The top 20 investors accounted for 70% of the total book.
In addition to being a yield and growth story, HKBN's practise of incentivizing employees made it an attractive story to prospective investors.
"Their culture really differentiates themselves, especially in Hong Kong," a second source close to the deal told FinanceAsia. "It's tycoon-dominated. But when you speak with anyone at HKBN, you're only one layer or two away from someone with a stake in the business."
The second source added, "All of the messaging around making Hong Kong a better place to live, about how they care about Hong Kong and how they're proud of it, makes it different to most IPOs."
Still, whether HKBN can match its growth forecasts remains to be seen. "They're selling a yield play and a potential growth story but there's a lot of scepticism that the growth will materialize," a banker not on the deal said. "If you believe in the growth, it makes sense. But if you don't, the top end of the price range seems greedy."
Indeed, some managers tell FinanceAsia that a few hedge funds pulled out of the deal because they did not see much secondary market upside. Sources note that these hedge funds were happy to buy at HK$8 per share in order to secure some upside in the aftermarket, but felt that HK$9 was too much.
Retail investors also weren't as keen on the company as some anticipated. Roughly 12% of the offering was set aside for Hong Kong public investors, but just over 8% went to this tranche.
Still, the strong demand from the institutional portion — which accounted for over 90% of the deal — allowed the issuer to price shares at the top.
Cleary, some investors are buying into the growth story, clamouring to get a piece of this year’s largest Hong Kong IPO to date. It is the second largest listing in Asia Pacific excluding Japan in 2015, behind only Jasmine Broadband Internet Growth Infrastructure Fund’s $1.686 billion flotation in Thailand earlier in February, according to Dealogic.
The deal was clearly a homerun for CVC. The private equity firm paid HK$4.87 billion in May 2012 for a 90.1% stake in what was then City Telecom, according to its prospectus. Then in August of that year, it sold a $40 million stake to GIC, and a $29 million stake to Carlyle. At HK$9 per share, CVC's 70.7% stake is worth about $840 million.
In addition to CVC, the other clear winner out of this flotation is the company's management.
Before the IPO, some 79 senior managers gave up two years' worth of salary to own shares; some of whom selling into the IPO, according to sources. In addition, some 400 managers — or 17% of the total workforce — were given the opportunity to own shares, and are guaranteed at least 1% of the company through the preferential offering in the retail portion.
HKBN is scheduled to list on the Hong Kong Exchange on March 12.
Yield and growth— unlikely marriage
The reoccurring theme for HKBN during the pre-marketing and bookbuild was that it was a growth story and yield play, a rare combination.
HKBN has invested billions since 2000 to build an expansive fibre network in the city. This allowed the company to grab market share in residential broadband services at the expense of smaller operators HutchTel and i-Cable. It is now targeting corporates in Hong Kong, hoping to move in on some of HKT Trust’s clients, its larger rival.
HKBN is forecasting between 4.8% to 5.4% yield for 2015 and 10% to 15% growth annually, tremendously attractive to both yield-focused investors and those after growth, the second source noted. "It ticks all the boxes," he said. "It's a very stable, raw utility company. There are very few that offer this kind of mix." He points to HKT, which only offers a 5% yield and only 5% growth.
"If [a company] is growing, they're going to keep the capital and recycle it to grow more. They don't pay out dividends," the source said. "There is no desire to go outside Hong Kong and roll out. But there are still opportunities in the enterprise and still a bunch of people not on fibre. That's where they get the growth numbers from."
HKBN's users totalled 692,000 in August 2014, giving it a market share of 34.2%. The company is forecast to add 35,000 subscriptions annually over the next five years by growing its market share and expanding into new buildings, mainly small companies and new homes, according to CLSA which was on the deal.
CLSA forecasts the company's Ebitda will grow at a compound annual growth rate (CAGR) of 14.5% in the next two years, while simultaneously improving operating efficiency.
HKBN is now focused on boosting its average revenue per user by getting some of HKT's higher paying corporate clients.
"[HKBN] will use what they learned on the residential side and tap into small businesses, companies with less than 10 people where they can offer bespoke solutions to at affordable prices," the source said.
Although the company has laid out the groundwork with its extensive fibre network, it remains to be seen how the competition will play out between HKT and HKBN in coming years. HKT is focused on its own high speed network, and may win some of HKBN's residential clients if it cuts prices to match HKBN's.
Still, HKT's management maintain they are more focused on profitability than expanding market share in the fibre network, as well as other aspects of their business, such as CSL New World Mobility, the mobile phone operator it purchased for $2.43 billion from Australia's Telstra Corp.
"[HKT's] strategy is focused on cash flow generation, and they're priced at a 30% to 40% premium to [HKBN]," the source said. "They're focused on CSL and their mobile position and integrating that, not on starting a price war to target broadband customers that HKBN has won.”
The company’s debt currently stands at HK$3 billion. But the company hopes that post IPO, its growing Ebitda will help the company deleverage. He added that HKBN’s debt is not out of line for other Hong Kong telecoms.
Goldman Sachs, JP Morgan and UBS oversaw the deal as joint sponsors and joint global coordinators, while CLSA and HSBC acted as joint bookrunners. Rothschild was financial advisor to the company.