Placement in Lucio Co’s restructured holding company raises $397 million

The Cosco Capital deal, which is accompanied by a substantial asset injection, attracts close to 50 investors despite a challenging market backdrop.
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Lucio Co owns a 51% stake in listed supermarket chain Puregold Price Club
<div style="text-align: left;"> Lucio Co owns a 51% stake in listed supermarket chain Puregold Price Club </div>

Cosco Capital, the newly created holding company for a group of assets controlled by Philippine businessman Lucio Co including a 51% stake in listed supermarket chain Puregold Price Club, has raised Ps16.8 billion ($397 million) from a combined follow-on and sell-down.

The deal, which was completed as stock markets across the region had another tough day yesterday, will ensure that Cosco retains a free-float of close to 30% following the simultaneous injection of four new assets into the company.

It also gave international investors their first real chance to buy into the company since details of the restructuring was announced in November last year. At that time it was a small mining business named Alcorn Gold Resources that had a market capitalisation of about $60 million.

The asset injection, which aside from the Puregold stake also includes a portfolio of liquor distribution companies, a portfolio of commercial real estate companies and an oil storage business, is transforming the company into a sizeable consumer-focused conglomerate under the leadership of Lucio Co. The company changed names from Alcorn to Cosco Capital earlier this month.

While thinly traded, the share price (and hence the market cap) shot up when the restructuring was first announced and in the past few months the stock has hovered between Ps14 and Ps19. On Wednesday this week it closed at Ps15, which is equal to the price at which shares are being issued to the Lucio Co Group as payment for the assets.

However, the asset injection and placement will increase the market capitalisation of the company even further to about $1.9 billion from $460 million, giving it the size and liquidity needed to attract global funds.

According to a source, about 70% of the demand came from international investors, most of which were long-only funds.

To market the story and the explain the change of the business, the joint bookrunners did a round of investor education about a month ago and two weeks ago the management also met potential investors on a non-deal roadshow. However, contrary to other similar restructurings in the Philippines that have been reoffered to investors through follow-on share sales that are effectively re-IPOs (note Bloomberry Resorts and LT Group in the past year alone), Cosco didn’t combine the roadshow and the bookbuilding.

Instead it chose to suspend the stock from trading yesterday and do an undocumented accelerated transaction over 24 hours. The order books opened after the Philippine market closed on Wednesday and closed at 5pm Hong Kong time yesterday. While this meant that Cosco’s own share price wasn’t live, unfortunately the issuer still had to deal with the fact that Asian stock markets had another bad day yesterday.

The Philippine benchmark index, which had held up fine earlier in the week fell 3.8% despite data showing that the country’s GDP grew by a greater-than-expected 7.8% in the first quarter. Analysts noted that the stock market sell-off was primarily a reaction to the strengthening in the peso, which was triggered by a belief that the strong economic growth means the rate cut cycle is over.

While this was clearly not the ideal backdrop for a share sale, the deal did attract sufficient demand to get done. It was not a huge surprise that the price was fixed at the bottom of the range though and it clearly helped that the bookrunners had secured demand for more than half the deal before launch.

In all, close to 50 accounts participated in the transaction, including some existing Puregold shareholders who saw an opportunity to increase their holdings at a discount. The company is one of the fastest growing operators of hypermarkets and supermarkets in the Philippines and its share price has more than tripled since the IPO in October 2011. It currently has a market cap of about $2.6 billion.

Others came into the deal to boost their exposure to the Philippines in general, sources said.

The deal comprised 1.6 billion shares, which accounted for 21.6% of the enlarged share capital. Just over 71% of the shares were new and sold to the market through a top-up placement. The rest were existing shares sold by Lucio and Susan Co. The company had regulatory approval to sell up to 2 billion shares, but settled for 80% of that.

The shares were offered at a price between Ps10.50 and Ps13, which translated into a discount of 13.3% to 30% versus Wednesday’s Ps15 closing price. As noted, it was fixed at the bottom of the range for the maximum 30% discount.

While that is indeed very wide, it is difficult to to look at the placement price solely in relation to the pre-deal share price given the complete transformation of the group that is taking place in connection with the deal. Indeed, investors would have been more interested in the absolute valuation and on that basis the placement price values Cosco at about 24 times the estimated earnings for this year, according to one source.

Or, looked at another way, investors were able to buy the company at a 25% discount to its net asset value. That compares to a 20% discount to NAV for the Ayala Group, which has been listed since 1976 and is one of the biggest conglomerates in the Philippines.

In the early afternoon today, Cosco’s share price was down 29.6% at Ps10.56, which put it slightly above the placement price. The broader Philippine market was up close to 1% at the same time.

The Ps12 billion ($283 million) of proceeds from the new share sale will not be used to pay for the new assets, but rather will go towards a further development of the real estate business, an expansion into non-food specialty retail businesses such as retail pharmacy chains and construction and hardware supply stores, the growth of its liquor distribution business and debt refinancing.

About Ps4 billion will be used specifically to invest in more Puregold-anchored retail properties and distribution centres, the term sheet said.

The Lucio Co Group is getting paid for the assets in the form of approximately 4.99 billion new shares at an issue price of Ps15 each. Those new shares were listed on the Philippine Stock Exchange today. Without yesterday’s placement, the new shares would have increased the group’s holdings in Cosco to 93.4%.

The shares held by the Lucio Co Group and related parties will be locked up for three months.

At $397 million, this is the second largest equity capital markets transaction out of the Philippine this year after LT Group’s $792 million re-IPO in April, which ranked as the country’s largest equity capital-raising ever, excluding rights issues. The latest sale pushes the ECM activity in the Philippines to a record year-to-date volume of $3.3 billion, which is more than double the $1.5 billion raised in the same period last year, Dealogic data show.

In 2012 as a whole, the Philippine ECM volume amounted to $8.4 billion, which was down from a record $17.5 billion in 2011.

The Cosco transaction was arranged by Deutsche Bank and J.P. Morgan, while Evercore Partners acted as the financial adviser to the company both with regard to the asset injection and the re-IPO.

¬ Haymarket Media Limited. All rights reserved.
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