Legend Holdings to spin-off Digital China

Legend Holdings will begin roadshows on Monday for the spin-off of its computer distribution unit Digital China.

In a bid to remove a conflict of interest, Legend’s largest shareholder, the Chinese Academy of Sciences, is splitting its own-brand computer manufacturing and distribution unit, Legend, from its foreign-brand distribution unit, Digital.

The Goldman Sachs-led deal is currently being pre-marketed, with formal presentations scheduled to begin on Monday, May 14, for pricing on May 29. The IPO of Digital China will comprise an HKSE-listed red chip offering, with both an institutional and retail tranche. Co-leads are Casenove and Merrill Lynch, with Bank of China as co-manager.

Currently, Legend is 57%-owned by the Chinese Academy of Sciences, with the remaining 43% in public hands. Existing shareholders will be offered one Digital share for every 10 Legend shares. Any minority shareholders that do not wish to subscribe to the IPO, however, will have a put option back to the company at the eventual IPO price, subject to a cut-off date two days before the end of roadshows.

These shares will then be added to the IPO float, which will comprise a further 12% of the company’s equity. The Chinese Academy will also guarantee to act as ‘buyer of last resort’, potentially raising its stake from 50% (post dilution) to the maximum 75% allowed under Hong Kong Stock Exchange law.

Preliminary estimates suggest that post IPO, Digital will have a market capitalization of about $300 million to $500 million. Should all the minority shareholders subscribe to the offering, the new money component will, therefore, raise about $30 million to $40 million from a roughly 88 million-share sale.

Market observers comment that the put option is a relatively unusual inclusion. “Legend is a very shareholder-conscious and focused company,” says one. “It wants to make sure that existing shareholders don’t get stuck with shares in a company that they may not want to own.”

In terms of pricing, the deal is said to have been pre-marketed at a wide range of 15 to 25 times 2001 prospective earnings. At these levels, it falls halfway between global and regional comparables.

Established players with lower growth prospects such as Ingram Micro of the US (the world’s largest computer distributor) are, for example, trading on P/E ratios of about 15 times earnings. Newer operators such as Taiwan’s Aurora Corp, on the other hand, are trading at much higher multiples of about 30 times.

Digital’s unique focus among China plays and the huge growth prospects of the mainland market – growing about 25% to 30% per annum – are likely to be the two big selling points of the equity story. To the nine months through to December, the company recorded a net profit of HK$99 million ($12.7 million), representing about 15% of Legend’s net income. Sales, however, equated to about 31% of Legend’s overall sales, totaling HK$6.4 billion.

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