The final four months of the year is traditionally a busy time for new listings in Asia and, with September less than two weeks away, market participants are watching for a potential revival of the IPO market.
With the exception of a couple of high-profile deals in Malaysia, there have been few reasons for excitement so far this year and, in mid-July, just after Malaysia’s IHH Healthcare had completed its $2.1 billion IPO, the value of new listings in Asia ex-Japan was down 51% from the same period last year, according to Dealogic data.
Global stock markets have been grinding upwards during the past few weeks, providing a slightly more positive backdrop for bringing new companies to market and the hope is that fund managers will return from their summer holidays with a renewed appetite to buy. However, there are still a lot of uncertainties with regard to the pace of economic growth, both in the troubled eurozone and in the US and China, and with a US presidential election coming up, markets are likely to remain volatile. So, while bankers will no doubt try to push out some of the IPOs in the pipeline, it isn’t too far-fetched to expect that investors will continue to prefer quick deals like block trades and follow-on share sales — at least in the short term.
One potential block trade being closely watched by both bankers and investors is the sell-down of AIG’s remaining stake in AIA. AIG still owns a 17.6% stake in the Hong Kong-listed pan-Asia life insurer, which as of yesterday was valued at $7.3 billion. And it will be free to sell all of that from September 4 when a six-month lockup expires.
If AIG decides to sell all its shares in one go, the deal could total as much as $7 billion (after the deduction of a discount), which would make it the largest equity capital markets deal in Asia ex-Japan this year and give a good boost in terms of league table credit for the arranging banks. The largest deal so far is AIG’s $6 billion sale of AIA shares in March.
Of course, AIG doesn’t have to sell its entire stake at once and it doesn’t have to sell immediately the lockup expires. If it doesn’t like the price, it may well wait — just like it did when its initial lockup expired in late October last year and it chose not to sell any shares at all until early March this year.
Yesterday, AIA’s share price closed at HK$26.80, which is slightly below the HK$27.15 at which AIG sold shares in March and off from a record high of HK$29.55 in late February. However, it is still well above the IPO price of HK$19.68. Bankers also note that AIA’s share price has been capped in a range between HK$26.75 and HK$27.50 in the past month, despite strong six-month earnings on July 26, and argue that it is unlikely to break above the top of that range while a potential sell-down is acting as an overhang.
Another thing that suggests a sale sooner rather than later is the fact that the proceeds from the sale will allow AIG to buy back more of its own shares from the US Treasury, which remains its largest owner after a $182.3 billion government bailout in 2008. And there is a belief that the government would like to reduce its stake in the insurance company to below 50% before the presidential election in November. The government has already sold AIG shares through three separate market transactions this year and, each time, AIG itself has bought a portion of the shares.
The eagerness to reduce its holdings was underscored by the fact that the latest sale took place just one day after AIG’s second quarter results in early August. At that time, the Treasury department sold $5 billion worth of shares at $30.50 each, well above its break-even price of $28.73 per share. AIG bought 60% of the deal, at a cost of $3 billion. The sale reduced the government’s stake in AIG to about 55% from 61%. As of August 8, the value of its remaining investment was $24.2 billion.
Whether it comes when the lockup expires in a couple of weeks or in a few months, another AIA block trade is expected to be well-received by the market given the company's unique exposure to 15 markets across Asia and its continued strong performance since the IPO in October 2010. The previous sale attracted more than 250 investors. Of the 25 analysts who cover the company, according to Bloomberg, 18 have a “buy” recommendation on the stock and only three advice investors to sell. Their average 12-month target price is HK$31.83, implying close to 19% upside from current levels.
Despite its ongoing efforts to raise capital to repay the US government, AIG is also viewed as a disciplined seller that isn’t too greedy when it comes to pricing.
The sale in early March comprised 1.72 billion shares, which accounted for 14.3% of AIA’s outstanding share capital. The shares were offered at a price between HK$27.15 and HK$27.50, which translated into a discount of 5.8% to 7.0% versus the latest close of HK$29.20. Sources said at the time that the discount was wide enough to account for a 20% gain in the share price in the previous two months as well as the large size of the deal. The price was fixed at the bottom for the maximum 7% discount.
There are other lockups set to expire in Asia during the next couple of months, although none is as high profile as AIA. Still, these expiries may result in smaller block trades as the controlling shareholders and IPO cornerstones become free to trim their stakes. Among the companies with lockups expiring in September or October are Thailand’s Tesco Lotus property fund, Philippine supermarket operator Puregold Price Club, Philippine conglomerate GT Capital, China’s Haitong Securities. Carlyle will also be free to sell its remaining 2.4% stake in China Pacific Insurance (CPIC) in late October.