IBM sells another batch of Lenovo shares

The latest $80.6 million placement leaves IBM with 7.5% of the Chinese computer maker.
International Business Machines (IBM) has trimmed its stake in Lenovo through another share placement, leaving it with 7.5% in the company as the three-year anniversary of LenovoÆs acquisition of its personal computer division approaches.

The HK$628.6 million ($80.6 million) transaction was completed at a tight 3% discount to yesterdayÆs close of HK$5.58, which is a bit of an achievement in the current markets û especially since the share price had gained 3.5% earlier in the day and 6.7% over the past two sessions. The final price equalled a 2.1% premium to the 10-day average closing price.

The Citi-led deal, which represented about 4.5 days worth of trading based on the volume over the past 14 sessions, came as LenovoÆs share price had been on the rise after hitting a trough just below HK$4 in late January, but the stock is still down 36% from its November 2 high of HK$8.74 which may explain why investors were keen to participate in the deal.

The 116.2 million shares were offered at a price between HK$5.30 and HK$5.41 apiece and sold at the top of the range for the tightest discount. According to a source, more than 30 investors participated in the deal, which was kept open for less than one hour after the market closed yesterday. The order book was said to have been comfortably covered.

The sale represents the latest divestment of Lenovo shares by IBM, which received a 15% stake in the Chinese computer maker as part payment for its PC unit in April 2005, and will see its stake fall from 8.8% to about 7.5%. The fact that the share price has come off substantially from its highs is unlikely to have worried IBM as the current price is still well above the HK$2.675 at which it initially received the shares. In February last year it sold a 3.5% stake at HK$3.20 per share and in May it offloaded a 2.6% stake at HK$2.92 per share.

Last week Lenovo confirmed that had entered a non-binding agreement to buy US-based Sanmina-SCI CorporationÆs PC manufacturing facilities in Mexico. The possible deal shows LenovoÆs continued drive to extend its footprint beyond China after the successful integration of the IBM business. The company, which is the fourth largest PC maker in the world, already has a manufacturing plant in Mexico, which it opened last year. It also has production facilities in Poland and India.

While overseas expansion will be an important growth driver in the years to come, analysts at Morgan Stanley note in a report published earlier this week that LenovoÆs dominating position in China, where it has a 29% market share, could help cushion its earnings in case of a global demand slowdown, making Lenovo something of a defensive play within the sector. They estimate that ChinaÆs PC market will grow by 19% in 2008, beating global PC growth of 6%. At the same time though, the competition in the China market is likely to intensify as other brands put more focus on this fast-growing market and with Lenovo already trading at 14 times this yearÆs projected earnings versus 12-14 times for other global brands, the room for outperformance is limited, they say.

Consequently, Morgan Stanley rates Lenovo ôequal-weightö and has a price target of HK$5.72 on the stock, which suggests a potential upside of only 2.4% from current levels.

The lock-up following this transaction will only last until March 31, leaving the US company free to sell the rest of its shares after that.
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