Philippine port operator sells secondary shares at 7.9% discount

Investors buy International Container Terminal's $142 million deal for the acquisition strategy, but a high valuation is seen as a deterrent to some.
International Container Terminal Services (ICT) has priced its fully marketed follow-on offering at a 7.9% discount to the latest market price for a total deal size of Ps6.85 billion ($142 million).

According to sources there was a lot of interest in the stock among international investors, but many of them felt the Philippine company was trading at too rich a valuation after rising about 160% over the past year.

This was perhaps best evidenced by the fact that the order book ended up only 1.7 times covered even after seven days of bookbuilding. The price was also fixed at the lower end of the guidance given to investors towards the end of the roadshow, which had suggested the transaction would price at a discount of between 5% and 8%.

However, the stock didnÆt come off much during marketing despite the volatility in equity markets generally and the discount was also significantly smaller than the 18% needed on a follow-on offering completed by the countryÆs fifth largest bank, Rizal Commercial Bank, a week ago.

Part of the reason for that, one source argues, is that ICT as an operator of container ports around the world is regarded very much as an international company even though it is based in the Philippines and listed in Manila. In 2006, 54% of its Ps1.8 billion ($38 million) in net income was generated outside its home country and consequently the share sale didnÆt give rise to the usual concerns about ôPhilippine-related risk.ö

ôIf there was ever a Philippine company to take on the road in the current volatile market environment, this is it,ö a banker focused on Southeast Asia said a few weeks back when ICT was still pre-marketing. ôThere should be a lot of interest on the back of its international growth strategy but valuation will be an issue since the stock is currently trading at 26 times (forward earnings).ö

To be honest though, aside from the past few weeks, most of the follow-ons by Filipino companies over the past 12 months have attracted a lot of interest precisely because they have been seen to offer exposure to the improving Philippine economy.

Contrary to many of those, ICTÆs offering wasnÆt so much about increasing the free-float per se û although a boost to 46% from 32% will certainly not hurt û but rather about bringing more international investors on to its register. And the company did play this aim to the maximum by offering only secondary shares.

This ensured that it didnÆt have to offer any of the shares to domestic investors and allowed the entire deal, which accounted for 12.9% of the share capital post-shoe, to be sold offshore.

The 261 million shares on offer were effectively treasury shares that were held by a subsidiary after being bought back from the market over the years. They were priced in the early hours of Thursday morning at Ps26.25 apiece, which compared with WednesdayÆs (March 22) closing price of Ps28.50.

The share price did fall towards the placement price yesterday, however, and closed 5.3% lower at Ps27.

The deal does include a 15% overallotment option, which could boost total proceeds to about $163 million and the free-float to 48%. UBS was the sole bookrunner, while CLSA had a junior role on the syndicate.

About 45 investors came into the book with the demand and allocations both split evenly between Asia, Europe and the US, sources said.

The deal got a little extra help after Beijing approved ICTÆs $50 million acquisition of a 60% stake in Yantai Port during the roadshow. The deal had been agreed and announced in January meaning it wasnÆt news, but the earlier-than-expected approval was still regarded as a positive event.

According to the sources, investors were primarily buying into the company on the back of the managementÆs proven track record of buying small and unprofitable container terminals and turning them around. Views on the container shipping cycle were of less significance as acquisitions are expected to remain the key growth driver.

ôIt is our view that the recent consolidation amongst the largest global operators has enhanced our ability to acquire terminals which fit our acquisition criteria as we believe that we are increasingly perceived by port authorities and shipping lines as one of the few remaining independent operators and that many of the largest global operators are increasingly less interested in small- to-mid-size terminals,ö the company said in the document.

The company's primary focus is on facilities with a total annual throughput ranging from 50,000 to 1.5 million twenty-foot equivalent units (TEU).

It typically wants a 100% stake and often moves in to take over the full operation of ports that are being privatised by governments around the world. In the share sale document the company noted that it often targets terminals in emerging markets which it believes have lower acquisition costs and better growth potentials.

As of the end of 2006, it had a portfolio of nine container terminals, which handled a combined throughput of two million TEUs last year. Four of the terminals were in the Philippines and one each in Brazil, Poland, Madagascar, Japan and Indonesia. Since then it has also signed an agreement to take over a terminal in Syria and have bought an additional facility in the Philippine city of Davao, in addition to the Yantai acquisition.

Its major terminals all have leading positions in their respective geographic markets. The company notes that the ôstrong local market position allows us to enhance operating efficiencies and maximise throughput, which we believe has a greater influence on our profitability than market share.ö
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