Hotel and casino operator Macau Legend Development on Friday postponed its initial public offering of at least HK$4.71 billion ($607 million) after failing to attract sufficient demand by the time the order books closed at 8am Hong Kong time that morning.
The bookbuilding coincided with a sell-off in global equity markets and poor trading debuts for a number of other market newcomers, which made investors hold off on deciding whether to submit an order or not. And when the Hong Kong market fell 3.9% in the final two days and the Dow Jones Index dropped 3.6% on Wednesday and Thursday after Ben Bernanke said the Federal Reserve may start to reduce its bond buying later this year, many of these investors eventually chose not to participate in the transaction.
The Hang Seng Index has fallen 7.2% since Macau Legend kicked off its roadshow and has lost 10.4% since the start of the pre-marketing on May 27.
Sources said on Friday that Macau Legend, which needs money to fund the redevelopment of the Fisherman’s Wharf area in Macau, would be considering its options, including the possibility of launching a restructured IPO this week. The talk in the market was that it may try to reduce the size of the offering to 15% of the share capital from the 29% that it was originally trying to sell, which suggests that it would be adjusting the deal size to match the amount of actual institutional demand.
One source said that it was unlikely that the price would be lowered as well and given that re-launched transactions tend to come at a fixed price, this would indicate a potential new deal size of about $314 million. It was initially trying to raise between $607 million to $787 million, although 13.8% of that would go to selling shareholders. If the deal is re-launched, the base deal will likely consist of new shares only to maximise the proceeds for the company.
Macau Legend needs approval from the Hong Kong stock exchange to reduce the deal size and it is said to have held such discussions on Friday. Sources say an announcement is likely to be published by the company today.
Since the company used full-year 2012 financials in its listing application, it has until June 30 to issue a new prospectus and re-launch the offering. Beyond that, it will need to update its financials, which would likely mean a longer delay of at least two to three months.
The company is projecting its capital expenditures for 2013 to 2016 to reach a combined HK$7.2 billion ($927 million), which is quite a lot when considering that its net profit last year amounted to HK$535.3 million and its bank balances and cash at the end of last year stood at just HK$112.1 million.
Hence there is no doubt that it does need capital. But, as one source noted last week, it doesn’t necessarily need equity capital and since the capex is staggered over a four-year period it also doesn’t need to raise the whole lot now. This does give the management a bit more flexibility on how to proceed from here. The company also had a gearing ratio of just 32.6% at the end of 2012.
According to the listing prospectus, the company is planning to spend about $200 million this year and $243 million in 2014 on its redevelopment and renovation projects.
The bookrunners did incrementally grow the institutional order book on the final day, according to the source, but it never got the stage where it could price the deal. The buyers that did come in were mainly long-only funds, which is no surprise really, since the redeveloped Fisherman’s Wharf won’t be fully up and running until 2017, according to the current timetable. But some hedge funds and high-net-worth individuals were also said to have submitted orders.
The company had also signed up Dynam Japan Holdings, an operator of pachinko game halls in Japan, as a cornerstone investor with a commitment to buy $35 million worth of shares.
The retail tranche, which accounted for 10% of the total, was also undersubscribed, although it was unclear by how much.
Macau Legend is not the only company to fall victim to the secondary market sell-off. A week earlier, Hopewell HK Properties pulled its Hong Kong IPO just before pricing due to a lack of demand. It had been trying to raise at least $670 million.
And late last week Singapore Press Holdings decided to hold off on launching the roadshow for its commercial property real estate investment trust (Reit) that is seeking to list in Singapore. The vehicle, which is called SPH Reit, is expected to raise about S$540 million ($423 million) and was initially planning to kick off the roadshow and institutional bookbuilding last Thursday.
It was followed last Friday by NW Hotel Investment, which decided not to launch its roadshow this week. The hotel-focused trust, which is sponsored by Hong Kong conglomerate New World Development, is hoping to raise between $700 million and $800 million from a Hong Kong IPO.
A source said the management and the owners will continue to monitor the markets and a decision on a new timing will be made in due course.
Meanwhile, two IPOs and three follow-ons were postponed in the US last week as a result of the tough markets — the largest number of aborted US deals in a single week so far this year, Dealogic data show. The largest among them was the $3.46 billion IPO for Votorantim Cimentos, which was set to become the second biggest IPO by a Brazilian company this year.
Macau Legend, which is controlled by business entrepreneur and former Macau legislator David Chow and operates three casinos in Macau under a service agreement with Stanley Ho-controlled SJM Holdings, was offering to sell approximately 2.05 billion shares at a price between HK$2.30 and HK$2.98 each.
The price translated into an enterprise value-to-Ebitda multiple of between 3.8 and 5.1 for 2017, based on the average forecasts by the syndicate banks. The deal was marketed on a 2017 basis since that is the first year when all its new casinos should be up and running.
However, because most analysts don’t have forecasts for other industry companies beyond 2015, the bookrunners were also providing 2015 EV/Ebitda multiples as a reference. On that basis, the price range valued Macau Legend at between seven and 9.4 times.
SJM Holdings, which is viewed as a key comparable, was trading at a 2015 EV/Ebitda multiple of nine times when Macau Legend opened its order books on June 7.
About 86.2% of the shares were new, while the remaining 13.8% were existing shares to be sold by David Chow’s mother and a company controlled by her.
The company is constructing three new hotels with casinos as well as a general entertainment and cultural facility, a canopied open-air colonnade for shopping, dining and entertainment and an improved marina at Fisherman’s Wharf.
The area was set up in the early 2000s by David Chow, his mother and Stanley Ho and the intention was to make it an integrated gaming, hotel, convention and entertainment complex. However, in the past few years it has turned into something of a white elephant with few visitors, and the company hopes that the redevelopment will attract people back again.
In its favour is the fact that the project is located on the Macau peninsula near the main ferry port that serves as the entry point to the territory for about 70% of all incoming passenger traffic, and it is also close to SJM’s flagship casino, the Grand Lisboa.
Macau Legend initially planned to acquire Fisherman’s Wharf in 2006 as part of a syndicated investment that also included a number of institutional investors, but that deal fell through. However, Macau Legend said in its listing prospectus that it had remained interested in the project and encouraged by the improved economic and financial environment, it finally acquired 100% of Fisherman’s Wharf in May last year through a share-swap transaction. By then, Stanley Ho had already sold his stake to one of Macau Legend’s substantial shareholders.
The expansion is expected to more than double Macau Legend’s current number of gaming tables to about 350 from 150 today. It will also multiply its combined number of hotel rooms to 1,800 from around 400, making it the second largest provider of hotel rooms on the peninsula after the Grand Lisboa.