Chinese state-owned food conglomerate Cofco Group launched the Hong Kong initial public offering of its meat processing business on Monday. To the surprise of many, the deal was structured with all primary shares, implying all the private-equity backers will remain committed to the business, rather than seek to cash out of it.
The 975.6 million-share deal for Cofco Meat is being pitched at HK$2 to HK$2.65 per share, potentially raising HK$2.6 billion ($333 million) if pricing comes at the top end and at least $251 million at bottom.
The base deal is equivalent to 25% of the firm’s enlarged share capital, and 27.7% if the 15% greenshoe option is exercised. In that case, the firm could raise an additional $50 million on top-end pricing.
Based on the indicative price range, Cofco Meat will command a maximum market capitalization of $1.33 billion. That is more than double the $600 million valuation paid two years ago by a consortium of private-equity firms: KKR, Baring Private Equity, Temasek and Hong Kong-based Boyu Capital.
That these PE firms want to hold on to their shares sends a positive signal to other prospective IPO investors. Moreover, they will now be required to hold all of their shares in Cofco Meat for an additional six months following the IPO; they can only sell up to half of their shares during an additional six-month period to follow.
The consortium acquired about 45% of Cofco Meat for a total of $270 million. Currently, KKR owns 20%, Barings 9%, Temasek 8.2% and Boyu 7.8%. Japan’s Mitsubishi also owns an indirect 10.4% via a joint venture with Cofco subsidiary China Foods.
PE owners may like Cofco Meat not only because it will continue to grow, but it also offers scarcity value as the only state-owned meat processor to list.
According to a banker, Cofco Meat is being pitched at a price-to-earnings multiple of 6.8 to 9 times based on syndicate consensus estimates of its earnings next year. That means the stock will be cheaper than WH Group, China’s largest private meat company, which trades at 12.3 times estimated earnings next year.
Meanwhile, Cofco also has an edge over some of its smaller rivals on branding, which is increasingly important in China’s food industry following a series of food safety scandals. Private companies such as WH Group and China Yurun have been responsible for these, while state-owned producers such as Cofco Meat may be seen as less likely to allow a scandal to unfold.
According to the deal terms, three cornerstone investors have committed a total of $87.4 million in the IPO, or roughly 26% of the deal based on top-end pricing.
Chinese electronics retailer Haier Group has committed $57.4 million worth of shares, while China Life Insurance and China Life Franklin Asset Management have bought $20 million and $10 million of shares respectively.
Under the indicative timetable, Cofco Meat’s institutional and retail bookbuild will run till October 24, and the shares are set to begin trading on November 1.