Hutchison ports trust seeks $5.8 billion from Singapore listing

Eight cornerstones will buy $1.62 billion worth of the deal, while the preferential offering will account for at least $388 million to $460 million.

Hutchison Port Holdings Trust yesterday set the terms for its Singapore initial public offering, putting it on track for the largest ever listing in the Lion City. The business trust is seeking to raise between $4.9 billion and $5.8 billion, which it will use to pay for the ports assets in Hong Kong, Macau and China’s Guangdong province that it is acquiring from Hutchison Whampoa’s 80%-owned ports unit.

The price is indicated between $0.91 and $1.08, which implies a 2011 annualised yield of 5.5% to 6.5%.

Even at the low end of the range, the deal is significantly larger than last year’s top Singapore offering, the $3 billion IPO of Global Logistic Properties, and will also trump the 1993 listing of Singapore Telecommunications, which Bloomberg put at $4 billion. If the deal is priced at the top end of the range and the greenshoe is also exercised, the total proceeds would come to $6.4 billion – exceeding the $6 billion raised from all IPOs in Singapore last year, combined, according to Dealogic data.

However, the actual amount that needs to be raised from the global offering is a bit smaller than that. To begin with, the bookrunners have already secured $1.62 billion from eight cornerstone investors. And then there is the preferential offering to Hutchison Whampoa’s existing shareholders, which will comprise a minimum of 426 million units, according to a source. Based on the indicative price range, it will bring in between $388 million and $460 million, of which Li Ka-shing-controlled Cheung Kong (Holdings) will take up about half to match its 49.97% stake in Hutchison.

Based on those numbers, the cornerstone tranche and the preferential offering will account for about $2 billion, or between 34% and 40% of the total deal. However, sources say the size of the preferential offering is likely to be increased if there is sufficient demand, as Li Ka-shing wants the deal to be shareholder friendly. At the same time, though, the parties involved in the deal don’t want this portion of the offering to be undersubscribed, and hence the flexibility to upsize later on. Shareholders have the right to buy one HPH Trust unit for every 10 Hutchison shares they own, but can also subscribe to excess units – thereby pushing the total demand above the 426 million units initially earmarked for them.

The total deal, including the cornerstone tranche, comprises 5.4 billion units, or 62% of the share capital at the time of listing. The split between the cornerstone tranche and the institutional placement will depend on the final price, since the cornerstones are investing $1.62 billion, rather than buying a fixed number of units. In addition to that, some 3%-5% of the deal is likely to be allocated to Singapore retail investors, and a similar amount may be offered to retail investors in Japan in the form of a public offering without listing (POWL).

The remaining 38% of the units will be transferred to HPH as part-payment for the ports assets, and will be divided between Hutchison Whampoa and PSA International, a Singapore ports operator wholly owned by Temasek that owns 20% of HPH. 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 a maximum of 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%.

In a preliminary prospectus published yesterday. HPH Trust confirmed that its policy will be to pay 100% of its distributable income as dividends. For the rest of 2011 that is estimated to amount to 37.40 HK cents (4.81 US cents) per unit, which on an annualised basis works out at 5.90 US cents per unit. However, as an incentive for the manager of the trust (a subsidiary wholly owned by Hutchison) to grow the distributions, the fee structure includes a performance fee that will increase depending on how much the distribution per unit (DPU) exceeds the forecast distribution. Starting from 3% if the DPU is up to 25% above forecast, additional performance fees of 6%, 12% and 18% will be paid if the excess distribution is more than 25%, 50% and 75% above forecast, respectively.

Although the HPH Trust will be quoted in US dollars on the Singapore Exchange, the divided will be declared in HK dollars, which is no doubt designed to suit Hutchison, which will be collecting about a quarter of the dividends each year.

The projected payout will result in an annualised dividend yield of between 5.5% and 6.5% for 2011 and between 6.1% and 7.2% for 2012. With regard to this year, that is at the upper end of the 4.5% to 6% fair value yield range that analysts have been suggesting. Meanwhile, the 10% growth in the dividend yield for 2012, implies a total return of about 16%.

This together with HPH Trusts’ strong position in the Pearl River Delta container port market is likely to have helped draw in the cornerstone investors, and according to bankers there was also a lot of anchor interest when the institutional bookbuilding kicked off yesterday. Contrary to cornerstones, investors who come in as anchors don’t have to commit to buying at any price throughout the indicative range, but can put in limit orders below the top end.

The largest cornerstone investor is Capital Research and Management Company, a US-based adviser and fund manager, which is buying $634 million worth of units. The other ones are Paulson & Co, the asset manager founded by John Paulson, which is buying $350 million worth of units in its capacity as adviser to various investment vehicles; Lone Pine Capital, a US-based investment firm that advises private investment funds, which will invest $186 million; Aranda Investments, which is controlled by Temasek; Taiwan-based Cathay Life Insurance; Metropolitan Financial Services, an investment company owned by a group of Southeast Asia-based private individuals that focuses on investments in natural resources companies; and Seacrest FIR, which are each buying $100 million worth of units. Ally Holding, an investment holding company owned by a major customer, rounds out the group with a $50 million investment.

The trading debut is scheduled for March 18. DBS, Deutsche Bank and Goldman Sachs are joint bookrunners. The POWL tranche will be arranged by Daiwa and Mizuho Securities.

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