MTR Corp privatization re-activated

The Hong Kong government has shortlisted banks for the second and final tranche in the privatization of the MTR Corp.
Banks have until Saturday to submit technical pitches for a deal that is scheduled to raise up to HK$15 billion ($1.9 billion). An oral presentation will take place next week, with a final decision expected two to three weeks later.

Similar to the government's previous divestment in September 2000, there is likely to be one financial advisor (the booby prize) and either two to three global co-ordinators (league table eligibility and larger fees). All three of the bookrunners from the original HK$9.4 billion ($1.2 billion) IPO - Goldman Sachs, HSBC and UBS Warburg have been shortlisted as global co-ordinators, as has Merrill Lynch, which acted as government advisor last time round.

Of a total of about eight banks on the list, observers say that ABN AMRO, Bank of China International, Credit Suisse First Boston and Deutsche Bank have also been included. The shortlist for financial advisor, on the other hand, includes BNP Paribas Peregrine and ING Barings.

The most notable exclusions are JPMorgan, Morgan Stanley and Salomon Smith Barney. All three are conflicted. For a government keen to ensure complete transparency, the selection of JPMorgan would have been particularly sensitive, raising issues of favouritism so soon after the appointment of the bank's Asian chairman, Anthony Leung, as the Territory's new Financial Secretary. 

There is also a conflict with the Kowloon Railway Corporation (KCRC). Traditionally HSBC and Morgan Stanley have acted as the railway operator's house bank, leading both of its global bond offerings. JPMorgan and Morgan Stanley are believed to have been recently appointed as joint advisors to the company.

For MTR Corp, the difficulties of bringing any form of secondary offering in the current market environment make it unlikely that the deal will be launched before the last quarter of the year. The government has also previously said that it would not launch a second deal within a year of the first, which was completed on September 28. Given that it wants to book proceeds before its next budget in March 2002 and the company will be in its annual results blackout during February, this effectively leaves October through to January to launch the issue.

"Basically, an offering has to be launched and closed on Tuesday January 8 2002," one banker jokes. "But there is a very limited window if you take government statements at face value."

Market conditions aside, the transaction is nevertheless, regarded as one of the most straightforward equity offerings in the 2001/2002 pipeline and will therefore be one of the most sought-after. During 2000, it also proved to be one of only a small handful of new issues that managed to stay above water by year-end.

Having listed at an institutional price of HK$9.38, the stock closed the year at HK$13.51, a roughly 44 % increase. Year-to-date, it has continued to perform well relative to the Hang Seng Index, dropping only 2.93%, against an overall decline of 12.063% (Wednesday's closes). It is also currently trading on a yield of 3.2% compared to 4.5% at launch, although as bankers point out, interest rates have fallen in the interim period.

The government currently owns 77% of the railway operator and property developer and intends to maintain its holding above 50%. Nearly one tenth of the local population applied for shares in the company first time round, with pricing coming in at the top of the deal's indicative range. With total demand of HK$164 billion ($21 billion), books closed 29.6 times oversubscribed on the retail side and 15.2 times oversubscribed on the institutional side.