Hutchison-backed trust prices IPO above the mid-point

HPH Trust, which owns and operates key ports in Hong Kong and Yantian, will raise $5.45 billion from its Singapore IPO after fixing the price at $1.01 per unit.

One day after Forbes revealed that Li Ka-shing had climbed three notches to 11th on its global rich list last year, the Hong Kong tycoon pulled off another deal to monetise some of his corporate wealth.

According to sources, Hutchison Port Holdings Trust is set to raise at least $5.45 billion from its initial public offering in Singapore after deciding to fix the price slightly above the mid-point of the original range, at $1.01 per unit.

HPH Trust, which is listing as a business trust, comprises the port assets in Hong Kong, Macau and China’s Guangdong province previously owned by Li-controlled Hutchison Whampoa. The money raised will be used to pay for the port assets that it is buying from Hutchison Port Holdings (HPH), which is 80%-owned by Hutchison Whampoa and 20% by PSA International, a Singapore ports operator that is wholly owned by Temasek.

At the final price, which won’t be formally announced until today, this is the largest IPO in both Singapore and Southeast Asia, exceeding last year’s $3 billion Singapore offering by Global Logistics Properties and the $4.1 billion Malaysian IPO by Petronas Chemicals, which ranks as the largest in the region. If the company exercises the greenshoe in full, the total proceeds could rise to as much as $6 billion, which, according to Dealogic, would match the amount raised from all IPOs in Singapore last year, combined. 

The offering demonstrates that the Singapore market is deep enough to absorb listings of more than $5 billion, something that had previously been in doubt. By choosing to list in Singapore rather than Hong Kong, HPH Trust gave up the ability to tap into Hong Kong’s rich retail demand, which can be significant for popular names and deals, and sources said there were also quite a few among the Hong Kong- and China-focused institutional funds that normally subscribe to big IPOs that didn’t buy.

Their absence might have been related to the fact that Singapore is a less liquid market than Hong Kong, but it is also possible that Li’s local reputation as a savvy asset investor with a knack for buying low and selling high also made some investors hesitate.

To compensate for the lower demand from Hong Kong, HPH Trust offered units to existing Hutchison Whampoa shareholders through a preferential offering on a one-for-10 basis. They also had the option to apply for excess shares. This gave at least some Hong Kong retail investors a chance to participate in the Singapore IPO. However, since the preferential offering didn’t allow investors to attach a price limit to their orders, many institutional investors were said to have preferred to subscribe through the normal institutional tranche.

That said, sources said the preferential offering was slightly oversubscribed. It wasn’t immediately clear whether Hutchison will choose to increase that portion of the deal beyond the 426 million units, or 7.9%, initially set aside for it, but it does have the option to do so. Li has committed to buy half the preferential offering through his flagship property company, Cheung Kong (Holdings), to match its 49.97% stake in Hutchison.   

Meanwhile, the deal attracted decent demand from global investors, including some infrastructure specialists who were attracted primarily by the yield (although analysts do expect decent growth as well, as throughput at the Yantian container terminals in Shenzhen in particular is expected to increase). The volatility on the global equity market and the sharp sell-off in the US on Thursday had no impact on demand. In fact, it may even have helped.

“If you are buying an IPO in a volatile market, you probably prefer to buy a defensive asset sponsored by a company you know well and that has a good brand name,” one banker said.

That’s not to say that the deal was overwhelmingly subscribed or that investors weren’t price sensitive. The bookrunners told investors that the deal was fully covered after the first day of bookbuilding on February 28, helped by the $1.62 billion cornerstone tranche as well as some sizeable anchor demand. And when the institutional offering closed at the end of trading last Thursday, some 350 institutional investors had submitted orders, according to the sources. However, the deal was still only two to three times covered, which suggests there were a lot of small orders.

Even so, being a yield play doesn’t automatically translate into investor demand. Only a week earlier, Perennial China Retail Trust (PCRT) postponed its S$1.1 billion ($862 million) Singapore IPO, because of the volatility in global markets. The business trust, which was being brought to market by DBS, Goldman Sachs and Standard Chartered, was scheduled to start trading on March 16.

In further evidence of the challenging market environment, Deutsche Bank, Macquarie and UBS called off the pre-marketing of MMI’s pending Singapore IPO earlier last week. The Chinese maker of precision technology products was aiming to raise about $300 million to $400 million, but, according to sources, the gap in price expectations between its majority owner, private equity firm Kohlberg, Kravis & Roberts, and investors was too great to pursue the offering at this time.

Price and valuation are clearly important to investors at the moment. Indeed, the order flow for HPH Trust increased after the bookrunners on Wednesday provided added visibility on the pricing by tightening the price range to $0.99 to $1.03 from $0.91 to $1.08 initially, which made some investors more comfortable to commit. On the final day, investors were told, in effect, that the deal would come at the mid-point of that “new” range.

The final price of $1.01 translates into an annualised yield of 5.85% for 2011, which compares with an indicated yield range of 5.5% to 6.5%. HPH Trust has committed to pay out 100% of its distributable income as dividends, which based on its earnings forecast, works out to be about 5.90 US cents per unit for 2011, on an annualised basis and 6.59 cents for 2012. HPH Trust has also given the manager of the trust (a subsidiary wholly-owned by Hutchison) an incentive to grow the distributions even further by offering a performance fee based on how much the distribution per unit exceeds the forecast distribution.

The ability to distribute essentially all of its free cashflow was the key reason why Li chose to list HPH Trust as a business trust. If it had listed as a normal company, it would only have been able to pay out 100% of its net income, which also includes non-cash items such as depreciation and amortisation. This also dictated the choice of listing venue, since Hong Kong doesn’t have the regulations in place to list a business trust.

The IPO comprised a total of 5.4 billion units, or 62% of the share capital. Based on their $1.62 billion commitment, the eight cornerstone investors will be allocated 1.6 billion units, or 29.6% of the offering. The remaining 3.8 billion units will be split between other institutional investors, the preferential offering, the Singapore retail offering and the Powl (public offering without listing) tranche targeted at Japanese retail investors. The final split hasn’t been determined yet, since the retail offering closes today, but expectations are that it and the Powl will each account for only about $200 million to $300 million.

The 38% of the units that are not sold to the public will be transferred to HPH as part-payment for the ports assets, and will be divided between Hutchison and PSA. At the time of listing, Hutchison will own 27.6% of HPH Trust, while PSA will own 10.4%. Their respective stakes will fall to 23.1% and 8.7% if the greenshoe is exercised in full, since those units will come out of the sponsor tranche. The shoe comprises 539.95 million shares, or 10% of the total deal. If it is exercised in full, the free-float will increase to 68% from 62%.

The largest cornerstone investor was Capital Research and Management Company, a US-based adviser and fund manager, which bought $634 million worth of units. Among the other buyers were high-profile global and regional names such as: Paulson & Co, the asset manager founded by US investor John Paulson; Aranda Investments, which is controlled by Temasek; and Taiwan’s Cathay Life Insurance.

The trading debut is scheduled for March 18. DBS, Deutsche Bank and Goldman Sachs were joint bookrunners.

¬ Haymarket Media Limited. All rights reserved.

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