OUE chairman returns with another sell-down

Coming three months after the last sale, the upsized placement raises $257 million and improves the free-float to 33%.

What a difference a few months can make. Back in June investors viewed with scepticism a plan by Singapore-listed diversified real estate developer Overseas Union Enterprise (OUE) to increase its free-float through a placement of existing shares and raise fresh capital through a convertible bond.

After more than a week of marketing, the share offering had to be reduced by 40% due to insufficient demand and the CB was scrapped altogether as investors were supposedly not happy with the potential dilution.

Fast forward three months and sentiment is completely different. Without any formal marketing at all, chairman Stephen Riady sold a 12.3% stake in the company last night at the top of the indicated price range and was even able to upsize the initial offering by 44% amid healthy appetite from a large group of investors. The deal raised S$337.4 million ($257 million) for the chairman, but more importantly it further increased the free-float from just over 20% to 33%.

Quite a few things have changed since the first sell-down, not least the market environment which has become significantly more favourable than in June when concerns about debt defaults in both Greece and Spain were resulting in a lot of volatility in global stockmarkets. The volatility made investors hesitant about taking on exposure to illiquid equities. By comparison, Singapore’s Straits Times Index finished at its highest level in more than two years yesterday after increasing about 20% from its 2010 low in late May, leaving it with a year-to-date gain just above 10%.

And OUE has performed even better, rising 33% from the placement price in June on a combination of improved trading volumes and evidence that the company is able to deliver on its business plan. In particular, the company’s acquisition of the DBS Towers for S$870.5 million, which was announced on August 11 and completed at the end of September, has been very well received by the market. At the same time, OUE last week also announced that it has entered into an agreement with Standard Chartered to raise S$750 million ($570 million) through a syndicated loan and fixed-rate bond offering, suggesting that it may not need to return to the equity market for a dilutive share sale for some time.

However, the stock is still trading well below where it was just before the announcement of the June share sale and 23% below its highs in mid-May. On the one hand this may suggest that investors are still not entirely convinced about the outlook, but on the other, for those who are convinced, it also suggests there is still room for further gains as the liquidity in the stock continues to improve.

Sources said the strong gains since the June sale together with reverse inquiries from a number of institutional investors had helped convince the bookrunners that another deal was doable and made them agree to release the seller from the six-month lockup he had agreed to after the June transaction.

Last night, Riady, through his company Golden Concord, offered 83.5 million OUE shares with an option to increase the sale by a further 37 million shares in case of demand. The price range was set at S$2.70 to S$2.80, which equalled a discount of 6.7% to 10% versus yesterday’s volume-weighted average price of S$3.00.

The upsize option was exercised in full, resulting in a final deal size of 120.5 million shares, or close to 60% of the existing free-float, and the price was fixed at the top of the range at S$2.80, for a 6.7% discount. The discount versus the closing price was wider at 8.2%, but the bookrunners chose to market the deal against the VWAP because of some erratic trading towards the end of the day yesterday.

Whatever discount you use though, it is significantly tighter than in the June placement when the shares were sold at a 28.1% discount to the latest close and a 34% discount to the last close before the deal was announced a week earlier. At that time, Riady sold a 9.2% stake in the company and raised $148 million.

According to the sources, the deal was covered within an hour and when it closed after about two-and-a-half-hours of bookbuilding it was multiple times covered across the price range. The demand was well balanced between long-only investors, hedge funds and existing shareholder, with more than 100 accounts participating overall.

Before the June placement, Riady, who is also chairman of Indonesia-based Lippo Limited, effectively controlled 88.5% of OUE through direct and indirect holdings after buying out a fellow shareholder, Barinal, in March this year. Barnial held 51.19% of OUE.

This latest sale reduced Riady’s stake in the company to 67.1% from 79.4%. Still, investors appear to look at these sales for what they are intended to be – attempts to improve the trading volumes in the stock through an increase of the free-float – rather than a lack of confidence in the company on the part of the chairman. Golden Concord Asia will be subject to a 90-day lockup following this sale.

Liquidity has improved significantly since before the first sale when only 2,000 to 3,000 shares changed hands per day, resulting in very erratic trading. It now trades about 1 million shares a day, partly as a result of the larger free-float, partly because of a five-for-one share split that has been completed in the past couple of months. However, last night’s sale still accounted for about 90 days worth of trading volume, so another pickup would be welcome.

Historically, OUE has derived almost all of its revenue from its hospitality operations and as of March 31 this year, it operated six hotels and resorts in Singapore, Malaysia and China. It has ownership interests in five of the six hotels that it operates, including complete ownership of the Mandarin Orchard Singapore. However, it has recently also diversified into the retail sector and is a partial owner of One Raffles Place, a 60-story office tower and retail podium. The adjacent 38-story Tower 2 at One Raffles Place is slated for completion in the second half of 2011. As of March 31, 2010, it had total assets of S$3.0 billion ($2.1 billion).

Credit Suisse, Morgan Stanley and Standard Chartered, which arranged the June transaction, were on this deal as well, and this time were also joined by Bank of America Merrill Lynch and CIMB.

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