Investors on Tuesday night got a chance to buy into Petron Corp, the largest oil refiner in the Philippines, when the company’s pension fund sold Ps7.65 billion ($175 million) worth of shares through a block trade.
The company, which is 68.3% owned by San Miguel Corp and accounts for close to 40% of the domestic sales volumes of refined oil products, had a free-float of just 7.4% before the sale and as a result the stock was thinly traded and didn’t really appeal to international funds.
This may change now. According to various sources, about 50% to 70% of the shares sold went to international accounts.
The block came on the back of a strong day in the Asian markets as investors got enthusiastic about stronger-than-expected GDP and industrial production growth in China and with next week’s Lunar New Year holidays fast approaching it seemed the perfect day to launch a block. Several indices and stocks in the region broke through key technical levels, which forced investors off the sidelines and helped extend the gains. At the end of the session on Tuesday, the Hang Seng Index had added 3.2%, Singapore’s Straits Times Index had gained 2.2% and in the Philippines the benchmark index was up 1.4%.
Despite this favourable backdrop, which also included positive markets in Europe and a 1.5% gain in the key US index future in the late afternoon, Petron was the only deal to hit the market on Tuesday. This was a bit surprising since bankers had been suggesting there were quite a few talks with potential sellers during the past week and by Tuesday only one other deal had materialised — the $601 million sell-down in Korean shipbuilder Hyundai Heavy Industries by KCC Corp last Wednesday. The window is also getting smaller, not just because of the upcoming holidays, but because many companies and their key shareholders are about to enter into blackout periods ahead of their full-year earnings. Perhaps the strength in the market took people a bit by surprise and potential sellers needed a bit more time to get ready.
It was, however, a bit ironic that Petron was the one to hit the market so perfectly, as the nature of this transaction — it was done at a fixed price and was all but covered at launch — meant that it could probably have gotten done on any given day when markets were reasonable. Or as one banker put it: “It was a deal that wasn’t correlated to the market.”
Petron may have set the ball rolling though, and one other seller emerged yesterday when a Temasek-controlled entity attempted to reduce its stake in Thailand’s Shin Corp, a telecom holding company that was once controlled by the family of Thaksin Shinawatra. The block of up to Bt8.3 billion ($260 million) was due to be completed late last night.
Cedar Holdings offered to sell a 6.2% stake at a price between Bt40.10 and Bt41.60, which translated into a discount of 4.4% to 7.8% versus yesterday’s closing price. Credit Suisse was the sole bookrunner, while Siam Commercial Bank acted as a co-manager.
Cedar, which is 62.5%-owned by Temasek, held about 45% of Shin Corp before last night’s transaction. Temasek also owns another 41.6% in Shin Corp through a wholly-owned entity named Aspen Holdings and the sale was said to be done specifically to boost the free-float to meet stock exchange requirements.
Petron Corp Employees’ Retirement Plan didn’t sell part of its stake in Petron specifically to increase the free-float — it was raising money to repay a loan to Petron — but this is nevertheless a key benefit of the deal. Sources noted that the free-float will double to 14.8% after the pension fund reduced its stake to 16.9% from 24%.
The fund sold 695.3 million shares at a fixed price of Ps11 per share, which translated into a steep 17.3% discount versus Tuesday’s close of Ps13.30. This was needed, sources said, because of the lack of liquidity in the stock. Indeed, based on the average daily turnover during the past six months, the deal accounted for more than 1,300 days of trading volume.
Petron also trades at a premium to other oil refiners in the region and while analysts agree that a premium is warranted due to its superior track record and its strong margins, investors said the existing premium was a bit too steep. During the extensive marketing and wall-crossing exercise conducted by the bookrunners in the lead-up to the deal, it became clear that investors would be happy to pay Ps11 per share.
The buyers were almost exclusively long-only funds and the majority were based in Asia. However, a few US and European funds did also participate, which suggests it was worth keeping the order book open until 1am Hong Kong time to allow US investors a bit more time to look at the deal.
The steep discount did attract some incremental demand, but again this came mainly from long-only investors. Hedge funds were not particularly interested due to the thin liquidity in the stock. The free float may have doubled as a result of this deal, but it is still below 15%, which suggests it will continue to be difficult to trade out of the stock at short notice, especially in large volumes.
The bookrunners were said to have wall-crossed more than 20 investors and, in total, about 40 accounts came into the deal. The fact that the money raised will flow back to the company where it will help support its growth plans, including an extensive capital expansion programme, would have added to the attraction for the buyers.
Petron’s share price fell 14.9% Ps11.32 yesterday, but it never dropped below the placement price (the low of the day was Ps11.26), which must be viewed as a successful outcome. Meanwhile, the Philippine stock market added another 0.75% yesterday and is now up 7% year-to-date. This makes it the best performing stock market in Asia so far this year together with India’s National Stock Exchange. The two markets are just ahead of Hong Kong, where the Hang Seng Index is up 6.8% and is hovering just below the key 20,000 point level.
Credit Suisse and UBS were leading the Petron transaction, while Standard Chartered participated in a junior capacity. All three banks had the title of joint bookrunner.