Pacific Basin VC's cash out

Pre-IPO investors take advantage of record high share price.

Pacific Basin VC investors IDB Carriers and Dry Bulk Shipping took advantage of a record high share price yesterday (Wednesday) to almost sell out their entire position in the company. Under the lead of Goldman Sachs, the two divested a 15.7% stake, raising HK$795.58 ($102.4 million) via the sale of 198.4 million shares.

Having been marketed at HK$3.90 to HK$4.05 per share, the deal was priced at HK$4.01, which represented a 2.2% discount to the stock's HK$4.10 close yesterday. This discount was slimmer than the one a second group of shareholders had achieved the day before, when HK$207.4 million was raised via a 53.2 million share deal.

Led by Macquarie Securities, this transaction was priced at HK$3.90 per share, representing a relatively steep discount of 5.45% to the stock's close of HK$4.125.

Goldman's deal was heavily oversubscribed despite the twin drag of a stock overhang generated by the company's VC shareholders and strong share price performance in a sector many believe has reached its peak. Books are said to have closed about 10 times oversubscribed with participation from about 75 investors (ex retail). About 60% of demand came from Asia, with the remaining 40% split equally between Europe and the US.

The deal represented 26 days trading and will expand the freefloat to 83.9%. IDB no longer has a stake in the company, while Dry Bulk will retain roughly 0.9% existing stake. Both companies had been expected to sell-out following the expiration of a lock-up in mid-July.

They appear to have timed the deal well, taking advantage of strong liquidity coursing through Asian equity markets. The stock itself is up 22.39% year-to-date and spiked 7.14% on Tuesday following the announcement of stronger than expected interim results on Monday.

Pacific Basin reported that first half net income soared 96% to $89.5 million. Of this amount, $16.9 million was generated by exceptional gains after the company sold just under a dozen vessels to increase cash flow and then leased them back again. It also has an option to re-purchase the ships at the end of the charter period.

Analysts have welcome the move since it frees up cash flow that will be able to support a high dividend pay-out and/or pay down debt. Indeed, the high dividend yield was probably the major selling point of the deal.

Based on a first half dividend of HK$0.30 per share and a likely annual dividend of a further HK$0.30, the stock should return about 16% in 2005, equating to a pay-out ratio nudging 65%.

Some analysts also believe there is a potential M&A story in the offing given that Pacific Basin is owned and run by a group of shipping entrepreneurs who may be looking to sell out to a bigger shipping company attracted to its young fleet and exposure to the China market.

The company operates in the dry bulk sector of the shipping market and has a young fleet of 50 vessels that average five years old versus a global average of 17 years for the handysize sector.