LT Group starts marketing for $700 million re-IPO

Following a restructuring, the Lucio Tan-controlled conglomerate that was formerly known as Tanduay Holdings has operations in the tobacco, beverage, banking and property sectors.

Bankers have started pre-marketing for a follow-on of LT Group, a Philippine-listed company controlled by the family of local tycoon Lucio Tan, giving investors another option to increase their exposure to the country’s consumer sector.

The company is expected to raise about $700 million, which will make it the largest equity fundraising in the Philippines since BDO Unibank raised $1 billion from a fully-underwritten rights issue in June last year. The latter counts as the country’s largest-ever equity capital markets transaction.

LT Group was previously known as Tanduay Holdings and focused on the production of distilled spirits, including Tanduay Five Years Fine Dark Rhum, which was the top selling rum brand in the Philippines last year, according to Nielsen.

However, in the past six months the controlling shareholder has injected a number of its other businesses into the company to create a consumer-focused conglomerate under the new name of LT Group. The follow-on will be the first real opportunity for institutional investors to buy shares in the restructured vehicle.

Currently, the company has a free-float of just 10.4%, which the remaining 89.6% owned by the family of Lucio Tan through a holding company called Tangent Holdings. Much of the public float is also held by rich Philippine individuals and the shareholder register shows no institutions among the top-17 largest shareholders.

It will also be the first time that investors will get a chance to gain exposure to the Philippines’ largest tobacco manufacturer and distributor, PMFTC Inc. The company, which has a market share of just over 90%, is a joint venture between Philip Morris Philippines Manufacturing and Fortune Tobacco. Following the recent restructuring, LT Group owns 99.6% of Fortune, which in turn owns 49.6% of PMFTC.

PMFTC owns several domestic cigarette brands, including Fortune, Champion, Hope and Jackpot, and has licence  to manufacture and sell Marlboro and Philip Morris cigarettes in the Philippines.

In addition to the tobacco and spirits business, LT Group is also involved in beverage production, banking and, to a smaller extent, properties.

It owns 99.99% of Asia Brewery, which is the second largest beer maker in the Philippines after San Miguel with brands like Beer na Beer and Colt 45. Its share of the domestic beer market is fairly modest, but Asia Brewery is the market leader in four non-alcoholic beverage categories, namely energy drinks, alcopops, bottled water and soymilk. It is also a major producer of packaging materials, including glass bottles.

It is also in the process of increasing its stake in Philippine National Bank (PNB) to 59.9%. PNB is listed on the Philippine Stock Exchange and recently merged with Allied Banking Corp to become the country’s fifth largest private-sector commercial bank in terms of total assets and deposits.

The final business in the portfolio is Eton Properties Philippines, a developer focusing mainly on residential real estate and large-scale township projects in Metro Manila and its surrounding areas. However, it also develops and leases commercial properties for retail, office and business process outsourcing tenants. LT Group owns 99.3% of Eton.

According to a source, the tobacco business accounts for almost half of the group’s net asset value. The second largest is the banking business, following by the combined brewery and distillery operations. The property business account for just a small portion of net asset value, the source said.

Initially, Tan was also thinking of injecting his holdings in Philippine Airlines and Air Philippines into the restructured LT Group. However, the impact of oil prices and other external factors make the airline industry quite volatile and the feedback from investors was that they preferred the two airlines not to be included, giving the LT Group a cleaner consumer focus.

The LT Group has approval to sell up to 2.5 billion new shares, which account for 27.8% of the existing share capital. However, given the thin free-float the sale will be carried out essentially like an initial public offering with a full management roadshow and a price range — the kind of deal commonly referred to as a re-IPO. One key difference versus an actual IPO is the fact that there will be no retail portion. Also, domestic and international institutions will be treated as one pool of demand.

The price range will be set ahead of the launch of the bookbuilding and the roadshow, which is expected to happen shortly after the Easter holidays in early April.

A syndicate research reports suggests a fair value of between 16.2 and 20.4 times this year’s earnings, which according to a source will put the company at a slight discount to the average valuation of other Philippine conglomerates. This is seen warranted since LT Group has less of a track record as a listed company than its peers.

It is also difficult to make a straight comparison as none of the other conglomerates have the same asset composition as the LT Group. For one, the LT Group is the only way for investors to get exposure to the tobacco sector.

Investors are expected to be using GT Capital as a benchmark, however, given that it was the most recent conglomerate to list. The company, which is controlled by the Ty family and involved in a range of businesses including banking, real estate, power generation, auto manufacturing and life insurance, listed in April last year following a highly successful IPO that raised $504 million. Since then its share price has gained 62% and it is currently quoted at 16.7 times this year’s projected earnings, according to Bloomberg data.

However, the IPO price translated into a 2012 P/E ratio of 13 times, which at the time compared to a sector average of around 16.5 times.

LT Group is currently quoted at a historical P/E multiple of 18.7 after gaining 16.2% since the start of the pre-marketing in Manila on Wednesday last week. However, the extremely low trading volumes mean that the share price doesn’t necessarily give an accurate representation of the value of the company.

To help support the transaction and add credibility to the price range, sole bookrunner UBS is expected to line up demand from a few cornerstone investors before launch.

The source noted that there is expected to be strong demand from domestic institutional investors for the deal, partly because they are already familiar with the businesses, partly because they are sitting on a lot of cash that they are looking to invest. However, large, liquid companies [as it is expected to be once this deal is completed] with a focus on the hot consumer sector are also seen as an attractive way for international investors to gain exposure to the Philippines.

The country’s benchmark index has gained 12.1% so far this year, making it one of the best-performing markets in Asia together with Thailand, Indonesia and Japan. Hong Kong and Singapore are both largely flat compared to where they finished 2012. The Philippine stock market gained 33% last year.

The LT Group offering is expected to price in mid- to late April.

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