PCCW raises more cash, this time by tapping the equity market

PCCW, Hong Kong’s largest provider of telecom services, last night raised HK$1.3 billion ($167 million) from an upsized placement of new shares. The sale came less than a week after the company sold $500 million worth of 5.5-year bonds in its first foray into the international debt markets in five years.

Based on FinanceAsia records, it is even longer since the company tapped the equity markets, and observers noted that like the bond sale, last night’s trade was quite opportunistic and saw the issuer take advantage of a high share price at a time when there is also a strong demand for new paper among investors. However, PCCW does have holes to fill with $1 billion worth of US dollar bonds coming due in 2011 and the company told investors that it would use the money partly to reduce its leverage.

Taking advantage of high share prices, companies around the region are carrying out small block trades almost daily these days as they try to get ahead of what is expected to be a flood of initial public offerings come September. Last night it was the Government of Singapore Investment Corp (GIC) that cashed in its remaining stake in Hong Kong-listed Ruinian International, a small-cap provider of nutritional supplements, health food products and health drinks in China.

At just HK$391.6 million ($50 million), the deal was small and the execution also proved pretty uneventful with the price fixed at the bottom of the offering range. However, the block trade was yet another example of the ongoing sell-down trend and the seeming desire of both sellers and investment bankers to make use of the relatively favourable market environment currently in place. The latter was underlined by the fact that GIC came off a lockup just last week.

But of last night’s two transactions, PCCW clearly drew the most interest. The deal was fully subscribed within 45 minutes, and with the base deal well covered across the range, the bookrunner decided to use more than half of the upsize option and increase the deal by 32% to 500 million shares. According to a source, the deal could have been upsized in full, but because one of the drivers of doing the deal was to increase the long-only institutional ownership, they decided to limit it at 500 million shares. The initial deal comprised 380 million shares with an option to upsize by a further 225 million shares.

In exchange, the price was kept towards the low end of the HK$2.58 to HK$2.70 price range – although that may well have been the case even if the deal hadn’t been increased, given that the stock has rallied 20% since the beginning of August. However, the price was fixed a couple of cents above the bottom of the range at HK$2.60, resulting in a 9.4% discount versus yesterday’s closing price of HK$2.87.

The deal, which was arranged by HSBC and Morgan Stanley, accounted for about 7.4% of the outstanding share capital and close to 10% of the free-float. But more importantly it accounted for 30 days’ worth of trading volume, meaning this was a good opportunity for funds wanting to pick up a sizeable exposure. The fact that there have been numerous analyst upgrades of the stock since PCCW released its first half earnings on August 13 would have helped to boost the interest.

PCCW declared a first half dividend of 5.10 HK cents per share, compared with no dividend in the same period last year, and since the stock doesn’t go ex-dividend until September 14, the buyers of the placement will be able to collect on that payout.

PCCW has also done a good job reducing its debt-related risks this year, with its maturity profile extended to 3.5 years from 2.9 years at the end of December last year. The refinancing has also been done at lower interest rates, resulting in lower costs. The net debt-to-Ebitda ratio at its main operating unit, Hong Kong Telecommunications, has fallen to 4 times from 4.4 times in December and 5 times a year ago. Overall, its gross debt remains largely unchanged at $4.2 billion, versus $4.5 billion in December.

The placement attracted close to 50 investors, primarily Asia-dedicated long-only funds. The demand, which was described by one source as “high quality” and “sticky”, came mostly from Asia, followed by Europe, and some interest out of the US.

Ruinian sell-down

Meanwhile, GIC sold its entire 6.6% stake in Ruinian, comprising approximately 68.6 billion shares or about 5 days’ worth of trading volume, based on the daily average for the past 30 days. The shares were offered in a range between HK$5.71 and HK$5.89, translating into a discount of 3% to 5.9% versus yesterday’s closing price of HK$6.07. They were priced at the bottom for the maximum discount.

The discount was not too wide considering that the stock has gained close to 15% since the beginning of August. The share price has doubled since the initial public offering in February this year when it was offered to investors at HK$3 per share. Ruinian raised $133 million in the IPO, which was arranged by CCB International and HSBC.

The buyers of the block included a mix of hedge funds and long-only investors, mostly from Asia, but with some interest from the US and a couple of orders from Europe, a source said. About 20-25 investors participated in the trade.

GIC was a pre-IPO investor in Ruinian together with Li Ka-shing-controlled CK Life Sciences, Templeton Asset Management and asset management firm Raffles. GIC sold a small portion of its holding as part of the IPO, and agreed to a six-month lockup on the remainder. The other three also saw their lockups expire last week, and sources say this likely made investors reluctant to push the price above the bottom of the range.

“People are a bit concerned about what the others will do,” one source said. “You don’t want to pay top dollars if you think there will be more paper out soon.”

CK Life still holds about 8.9% of the company, while Templeton owns 4.8% and Raffles has a 5.2% stake.

The block trade was arranged by UBS.