Wan Long, chairman and chief executive of WH Group, knows how his company’s initial public offering went from being this year’s high-profile flop to a success in just four months: he fired 27 banks.
At the end of July, the Chinese pork producer managed to raise $2.05 billion from its second attempt at an IPO after slashing the number of syndicate members from a record 29 to two, demonstrating that more banks does not necessarily equal more investors.
“There are many reasons our first attempt failed,” Wan said in an interview with FinanceAsia. “Too many banks participating was a major one.”
The Henan-based pork producer’s decision to cut its syndicate may represent a turning of the tides among mainland companies that have traditionally hired dozens of banks to handle their IPOs.
Chinese issuers have used record numbers of banks to work on their flotations during the past few years, the assumption being that more banks will lock in more cornerstones and institutional investors.
PICC Group hired 17 bookrunners in its $3.1 billion December 2012 IPO, while Chinese securities brokerage Galaxy Securities locked in 21 banks for its $1.37 billion flotation last spring. Galaxy Securities held the record until WH Group selected 29 banks to work on its syndicate, which included seven joint sponsors and 15 global coordinators.
WH felt the large deal size — it initially aimed to raise between $4.8 and $6 billion — justified such a huge syndicate. Original forecasts valued the company as high as $25.5 billion although a number of investors felt this was overly ambitious. So WH, which became the world’s largest pork producer after its landmark acquisition of US producer Smithfield in 2013, knew it had to do everything possible to convince investors it deserved the high valuation.
The way to do this, as far as WH Group was concerned, was to hire as many banks as possible, with their deep connections with institutional investors and hedge funds around the world.
“When we first came to the market, we knew very little about Hong Kong,” said Wan. “The investment banks all have a history in coordinating relationships. They were asking to join our IPO. So we hired them all.”
It soon became clear to everyone involved in the deal, including WH, that such a gigantic syndicate was a hindrance, not a help. Bankers noted it was almost impossible to organise 29 banks, and this disorganisation was felt among prospective fund managers, who complained about receiving multiple calls from different banks on the same company all with varying information.
This, coupled with the high price and valuation, led investors to shun the company when books opened, and ultimately led to the deal getting shelved.
“It was difficult to manage so many banks, [as many] simply went their own ways,” Wan said. “Secondly, the more banks that got involved in the IPO [meant] that fees dropped for each of them, since the total underwriting fees are fixed.” This lowered the banks’ incentives, he noted.
Many companies would have slinked off and waited before rushing to the public markets again. Issuers that fail to IPO at their first attempt are often tarred by the experience, which can lead to poor uptake, lower amounts raised and potential delays.
But WH was keen to pay off the $4.8 billion debt it took on when it bought Smithfield.
Rather than sit on the sidelines and attempt to bring the same deal to the market next year, WH swiftly made a number of changes and took advantage of positive market conditions to bring a new and revised deal to the market just four months after its first attempt failed.
The vast syndicate team was cut to just Morgan Stanley and BOC International. In addition, rather than insist the price range stay at HK$8 to HK$11.25 per unit, it agreed to lower the price to HK$6.20 per share. This valued the company at 11.5 times 2014 earnings, much more attractive than the 15 to 20.8 times 2014 earnings marketed in the first attempt.
It worked. The company raised $2.05 billion by selling 2.56 billion shares in July, with demand particularly robust among Hong Kong retail investors, with this tranche oversubscribed by 55 times. “I think [it was hugely] positive for the Hong Kong market,” one banker close to the deal said. “A lot of people thought it couldn’t be redone so quickly.”
“In the second attempt, we changed the structure of the offering, such as the valuation, shares on offer and the size,” Wan told FinanceAsia. “We also cut the number of bookrunners sharply. Morgan Stanley is a global investment bank and BOCI knows Asia and China well, and has a strong investment bank. These two banks were enough for our offering.”
How did the 27 react when they found out they were no longer working on one of this year’s largest IPOs? “They took it well,” Wan said. “They understood why we made the decision. They understood they couldn’t be in the way of our second attempt.”
Fewer bookrunners going forward?
Wan dismissed the idea that more banks means more investors, although it remains to be seen whether Chinese issuers will follow the pork producer’s footsteps.
“The global investor community doesn’t change much,” Wan said. “[All global] banks approach the same investors. So [it doesn’t matter] how many banks handle the transaction.”
Bankers are mixed. Many remain convinced mainland issuers will continue to use high numbers of bookrunners, regardless of the fact that large syndicates do not help, and can backfire.
But others are optimistic that times may be changing, with the banker noting that WH’s second attempt to come to market could not be more different than the first.
“Here was a company that tried to do an IPO badly,” the banker said. “They were way too aggressive on the valuation and the bookrunners played off each other.” He described the second attempt as a disciplined IPO with a couple of bookrunners at a good price discovered from pre-marketing.
“This is old school, back-to-basics. It’s showing people are re-awakening to Hong Kong’s IPO market, as long as [the IPOs are] done properly.”
He added, “It’s great to see Chinese issuers are learning.”
Additional reporting by Jing Song
