PCCW and Swire prepare for spin-offs

PCCW's proposed listing of its telecom assets in the form of a trust and Swire Properties' listing by introduction will bring two blue-chip Hong Kong assets to the market -- something rarely seen these days.
One of Swire’s HK projects

New listings by pure Hong Kong companies are a rarity these days when virtually all IPOs on the Hong Kong stock exchange are by companies based either in China or some other country outside its borders. The reason, of course, is that most Hong Kong companies are already listed.

So it is interesting to see not just one, but two, major Hong Kong businesses preparing for a listing in the next few months, namely Swire Properties and HKT Trust, which comprises PCCW’s telecommunications business. Both are spin-offs from companies that are already listed, but account for the majority of revenues and profits at their respective parent companies, making this an interesting exercise not just for the unit that is being spun off, but for the parent company and its shareholders as well.

The two listing candidates have chosen different routes towards their separate listings, however.

Swire Properties, the property development and investment unit which is currently wholly owned by Swire Pacific, said in statement at the end of last week that it has decided to list by introduction. This means that it won’t be issuing any new shares, although it will distribute about 17% of Swire Properties’ share capital to existing investors in Swire Pacific.

PCCW on the other hand is aiming to float its telecom assets on the Hong Kong stock exchange in the form of a dividend-paying trust and said over the weekend that it may raise about $1.3 billion, assuming it is able to sell as much as 36.7% of the trust and based on a valuation floor that translates into a dividend yield of about 9%.

Swire’s announcement is a change from its earlier plan, which saw Swire Properties pursue a Hong Kong IPO in late April/early May last year. The company was aiming to raise up to $2.7 billion by selling about 15% of its share capital, but called off the deal a day before pricing amid a deteriorating market environment.

The cancellation was a big disappointment for the group as the property unit needed money to finance its continued expansion, particularly in China. Swire Pacific was also keen to equip Swire Properties with its own funding platform so that it would be able to more easily raise additional capital when needed. Hence, there has been a lot of speculation about whether Swire Properties would make another attempt at an IPO. The volatile market environment that has persisted for much of this year is making new listings challenging, however, and would also likely require the shares to be sold at a big discount to net asset value — something that would probably not go down well with Swire Pacific’s existing shareholders.

However, a couple of month ago, Swire Properties sold its Festival Walk mall in Hong Kong to Singapore’s Mapletree Investment for HK$18.8 billion ($2.4 billion), which means it now has enough capital to cover its current funding requirements without having to sell new shares.

But the group still wants to create a platform for future fundraisings and a listing by introduction will achieve that without the company having to take any market risk. According to last week’s statement, the plan is to distribute 10% of Swire Properties’ share capital to the public shareholders of Swire Pacific and another 7% to John Swire and Sons (JSS), which is the controlling shareholder of the parent company. This ratio means the ownership structure between controlling and minority shareholders will be the same for both Swire Pacific and Swire Properties. JSS owns approximately 39% of Swire Pacific’s share capital and 56.8% of the voting rights.

Since Swire Pacific’s shareholders will receive the shares in Swire Properties for free this should be a fairly uncontroversial exercise. And with the property division accounting for 76% of Swire Pacific’s total asset value and the parent company having a market capitalisation of about $9.8 billion, a 10% free-float should result in decent liquidity in the stock — something which is otherwise a big problem when it comes to listings by introduction.

PCCW is taking an altogether different approach to the spin-off of its telecom business, which it acquired from Cable & Wireless in 2000. Floating the assets as a dividend-paying trust allows PCCW to raise cash for debt repayments and at the same time distribute a bigger portion of the earnings from the telecom business to shareholders.

The listing vehicle will not be a business trust as the regulatory changes needed to allow such vehicles to list in Hong Kong are not yet in place — it is being referred to as a fixed single investment trust. However, the company and its bookrunners have come up with a structure that is very similar to the business trusts listed in Singapore, but works under the current Hong Kong listing rules. One key difference, according to sources, is that it will only take 50% of shareholders to vote to remove the trustee and management companies, compared to 75% for Singapore business trusts. Also, there will be no regulatory requirement with regard to how much dividend the trust needs to pay, although PCCW has said that HKT Trust will pass on 100% of the adjusted funds flow to its unitholders.

PCCW’s controlling shareholder Richard Li, the youngest son of Hong Kong tycoon Li Ka-shing, will be hoping that he has finally found a structure that will be acceptable to minority shareholders after several failed attempts to take PCCW private in recent years.

In a statement issued on Sunday, that provided further details on the proposed structure, PCCW argued that a separate listing of the telecom business will unlock value for shareholders and better identify and establish the fair value of the telecom business. It will also create a more defined business focus and efficient resource allocation with regard to the telecom business, and at the same time increase the visibility of PCCW’s remaining businesses — media, solutions and properties.

And it will boost the financial resources for the telecom business and for PCCW, the company said.

The first HK$7.8 billion ($1 billion) of the net IPO proceeds will go to HKT and will be used to reduce its debt. This will ensure that more cash will be available to distribute to the unitholders. Any proceeds above that will go to PCCW and will go towards additional investments in its growth businesses, such as the media and solutions businesses, with the aim of creating value for its existing shareholders.

The company earlier this month said that HKT Trust will be listed in the form of share stapled units, which will have three components: a unit in HKT Trust; a beneficial interest in one ordinary share of HKT Limited that is linked to the unit; and a preference share in HKT Limited that is stapled to the unit.

And on Sunday it said it will sell between 25% and 36.7% of these share stapled units as part of a global offering, or up to 40% including a greenshoe. At the top end of the range, pre-shoe, the net proceeds are estimated to be $1.3 billion and at the bottom end about $873 million. This assumes a price per unit that translates into a 9% yield, based on the company’s cashflow projections for 2012.

One source noted that a 9% yield gives PCCW a significant buffer versus the sector average of 6.5%, although that may well be necessary in the current market environment. PCCW itself is currently trading at a 2012 dividend yield of about 5.3%, according to Bloomberg.

The IPO will include a 10% tranche earmarked for Hong Kong retail investors, but the company will also offer 10% to existing PCCW shareholders in the form of a preferential offering. That latter portion can be upsized to 30% depending on the demand. However, PCCW shareholders have complained for years about the company’s lagging share price, so it is somewhat difficult to see them being interested in paying for the same assets that they have already bought once.

That in mind, PCCW will also distribute an additional 5% of HKT Trust’s share capital (on top of the global offering) to its existing shareholders for free. These bonus shares will not be handed out immediately, however, but will be distributed in two portions — at the end of the first quarter following the listing and then again 60 days later. While this is free, it is also designed to limit the selling of PCCW shares in the lead up to and immediately following the listing of HKT Trust.

The IPO of HKT trust requires approval from PCCW’s existing shareholders at an extraordinary general meeting that has been scheduled for October 12. Assuming it gets the nod, the deal is expected to launch shortly thereafter, depending on the market conditions. HKT Trust already has stock exchange approval to go ahead.

Swire Pacific has not set a time table for the listing of Swire Properties and said in last week’s statement that it has yet to file a listing application with the Hong Kong exchange. However, since it is listing by introduction, Swire Properties will not need to wait for a suitable market window, but can list whenever it is ready.

PCCW has hired CICC, Deutsche Bank and Goldman Sachs as joint sponsors, joint global coordinators and joint bookrunners. Also mandated as bookrunners are DBS, HSBC, J.P. Morgan and Standard Chartered. And while not officially confirmed, sources say that HSBC and Standard Chartered are likely to also take on the role as joint global coordinators.

Swire Properties have retained the same banks that were involved in last year’s IPO, namely Goldman Sachs, HSBC and Morgan Stanley

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