Michael Ying reduces Esprit stake below 5%

The deal is upsized by more than 50%, allowing the former chairman to raise about $600 million in his first sell-down in three years.

Former Esprit chairman Michael Ying last night sold HK$4.67 billion ($602 million) worth of shares in the Hong Kong-listed fashion retailer, reducing his stake below 5%. The sale, which was well received despite a sharp drop in US markets, was upsized from an initial deal size of about $384 million.

Ying, who founded Esprit more than 30 years ago, reduced his stake in the company six times between May 2003 and September 2006, but since he stepped down as chairman at the end of 2006, he has made no further sales. Consequently, the move could cause a negative reaction in the market as it may spark concern that insiders don't see potential for the stock to break out of the HK$50 to HK$57 trading range where it has hovered since early September -- although frankly, given the sharp drop in overseas markets, it is hard to imagine the share prices of any Hong Kong stocks heading higher today.

Yesterday's transaction accounted for about 7% of Esprit's outstanding share capital and will reduce Ying's stake from 8.7% to just under 2%. The fact that his stake falls below 5% is significant since it means that he will not have to disclose any further sales. However, his remaining stake will be locked up for 90 days. Ying remained a non-executive director in Esprit until early 2008, but since then his only link to the company has been the shares he owns.

The sale comes after Esprit announced better-than-expected earnings for the six months to December 31 during the lunch break on Wednesday, sparking a 7.9% rally in the share price that day. Sources said UBS, which was the sole bookrunner for the deal, approached Ying after the earnings release and proposed a sale. The advance was not the most obvious since Esprit's share price is currently well below its record highs from October 2007, when it pierced HK$120, and is also down slightly from when Ying last sold shares in the company in September 2006. That sale was done off a record close of HK$72 and was priced at HK$69 for a 4.2% discount.

But Ying agreed and contrary to when he was chairman of the company and routinely invited several banks to bid for his business, he mandated UBS as the sole bookrunner for the transaction without first checking whether any other bank would be able to offer better terms.

Ying initially offered to sell 55 million shares at a price between HK$54.25 and HK$55.95, which represented a discount of 3% to 6% versus yesterday's close of HK$57.70 (following Wednesday's 7.9% jump, the share price edged down by 0.3% yesterday).

According to one source, the deal attracted sizeable orders from a number of global investors and the base deal size was multiple times covered. In fact, the top two orders were said to have covered the entire deal before the size was increased. All in all, about 50 investors from Asia, Europe and the US submitted orders.

Some of the orders did not have a price limit attached, but given the decline in equity markets while the bookbuilding for the Esprit placement was ongoing -- the Dow Jones index lost 2.6% after weekly jobless claims data suggested the US economy may be weaker than initially thought -- the parties involved decided to price at the bottom of the range and instead upsize the deal by more than 50% to 86 million shares.

However, even at the maximum 6% discount, this is one of the tightest priced placements in a Hong Kong-listed stock this year.

Esprit said on Wednesday that its six-month net profit fell 5.2% to HK$2.7 billion, surprising analysts (and evidently the market too) who had generally expected a worse decline. Adding to the positive picture, the retail business, which accounted for 52% total turnover, posted a 9.5% increase in revenues to HK$9.62 billion, while revenues from the wholesale segment dropped 13.9% to HK$8.73 billion.

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