Pre-marketing starts for Las Vegas Sands and Minsheng Bank

Targeting a combined $5 billion, the two high-profile deals are coming to market at a time when the global equity markets are again starting to look more challenging.

The primary equity market in Hong Kong is becoming increasingly tough with poor interest for several of the Chinese property developers and a mediocre secondary market performance for many newcomers. On top of that, there is talk that many fund managers may close their portfolios early this year to preserve the sizeable gains they have made since the global equity markets bottomed in March and the trading pattern last week did show clear signs of profit-taking.

Hong Kong's market fell 5.9% in the three days to last Thursday, but then made a spectacular rebound on Friday when it was up as much as 3.2% intraday on the back of stronger-than-expected GDP data in the US and a bounce on Wall Street, before settling 2.3% up on the day. However, the US market tumbled again on Friday with the Dow Jones index losing 2.5%, suggesting that Asia and Hong Kong will come under renewed selling pressure today.

Despite all this, the stream of listing hopefuls in Hong Kong is showing no signs of letting up. In addition to Longfor Properties, which is kicking off a formal roadshow today (see separate story on today's website), bankers will start a one-week investor education for two other multi-billion dollar deals this morning with roadshows and bookbuilding set to start next Monday.

Both deals -- the Macau operations owned by Las Vegas Sands (LVS) and China Minsheng Banking Corp -- are expected to attract a lot of interest from investors, assuming that is, that they are still open for business. 

The LVS business, said to be listing under the name of Sands China, could fetch about $2 billion to $2.5 billion depending on the final price and how many secondary shares will be put up for sale, while Minsheng, a privately controlled Chinese lender that is already listed in Shanghai, could raise more than $3 billion based on its current A-share price.

Significant question marks remain around both deals, which will need to be straightened out during this first week of pre-marketing. For Minsheng, the key issue is how it will price in relation to its A-shares, which are currently trading at about 1.7 times the lender's book value. Other Chinese companies that have completed dual listings in recent years have been required to price the Hong Kong-listed H-shares at a premium to the Shanghai-listed A-shares. While this has sometimes resulted in quite a steep valuation for the H-shares, it has not been that difficult to implement for the companies that have completed the bookbuilding and pricing of the H-shares before the A-shares have started trading.

However, Minsheng's A-shares are already trading in Shanghai and thus the Hong Kong IPO will to some extent be priced against a moving target. While the situations are not exactly the same, the difficulty in doing this became clear when China Pacific Insurance tried to follow up its December 2007 A-share IPO with a listing in Hong Kong in March 2008. While the company was committed to price the H-share portion above the A-share IPO price (as opposed to the A-share price at the time of the H-share listing), it still proved impossible as the secondary markets tumbled and the valuation of other Hong Kong listing insurance companies fell well below the valuation implied by China Pacific Insurance's A-share IPO price. In the end, the deal had to be pulled.

Since Minsheng has been listed in Shanghai since December 2000, the IPO price can obviously not be used as a benchmark, and it is unclear whether Minsheng will be bound by any minimum pricing requirements related to the A-share at all. After all, it isn't a state-owned bank, which suggests the regulators will have less say on the issue. On the other hand, this has been the praxis on other deal and some market talk suggest banks involved in the deal have agreed to voluntarily stick to the same principle when it comes to Minsheng.

If they do, it is worth noting that Minsheng should have more room to price above the A-share and still appeal to H-share investors than China Pacific Insurance did, since the other Chinese banks listed in Hong Kong trade at significantly higher price-to-book valuations of about 2.2-2.4 times, according to sources.

The bank is selling up to 3.32 billion shares, or 15% of its total issued share capital, with 5% earmarked for Hong Kong retail investors. A portion of the deal is also expected to be set aside for cornerstone investors, with bankers saying that there has been quite a lot of interest from investors to come into the deal in this fashion -- even if it means a six-month lockup.

The bank has tried to list in Hong Kong a couple of times before, in 2004 and 2005, but the plans were called off, first due to a legal issue and then because of difficult market conditions. It is reviving the plans at a time when the Chinese regulators are pushing the domestic banks to improve their core capital ratios by raising more equity, and for that reason, sources say they believe Minsheng would want to push ahead with the deal even if the secondary market remains challenging. And so far, the belief is that there will still be sufficient investor demand for the large, high-profile deals in the pipeline, while the smaller offerings may suffer.

UBS is the sole global coordinator for the Minsheng IPO and will be joined as a bookrunner by BOC International, China International Capital Corp (CICC) and Macquarie, which were all mandated in June. However, sources say a fifth bank has been added to the line-up in time for the pre-marketing. A small China-based securities firm, Hai Tong will be a joint bookrunner, but will get only a minor portion of the economics, the sources say. Macquarie too is said to be receiving a smaller portion of the fees compared with the other three banks.

It was less clear, even on the eve of the launch of pre-marketing, which banks will be involved in the LVS deal, and specifically what roles they will have. Based on conversations with numerous sources, it seems pretty certain that Citi, Goldman Sachs and UBS will be the joint global coordinators, while Barclays Capital and BNP will join them as joint bookrunners. The situation has been very fluid though -- Barcap was initially a JGC alongside Goldman but was dropped to make room for Citi and UBS, while BNP appears to have been added into the deal only over the past week or so -- and bankers say, there has been no confirmation that this is the final line-up. One possible change could concern CLSA, which has recently been added as a sponsor together with Goldman, but does not currently have a bookrunner role.

The change in the mandates at such a late stage is related to the fact that LVS is prioritising banks that are also willing to provide lending. The company is currently in the process of securing a $1.75 billion project financing for the development of two adjacent sites on the Cotai Strip in Macau, known as projects five and six. Work on these projects were halted at the height of the financial crisis last year, but is expected to resume in the new year.

LVS will use about $500 million of the funds raised from this IPO towards these projects as well, while about $820 million will be used to repay an inter-group shareholder loan in order to achieve a cleaner structure of the company at the time of listing. Another $300 million will go towards the repayment of a credit facility in Macau. Based on a planned sale of $1.7 billion worth of primary shares, this will also leave room to set aside about $80 million for working capital. The remaining shares on offer will all be secondary shares sold by LVS to raise money for other parts of the business, including its Marina Bay Sands resort and casino in Singapore, which is expected to open its doors in the first quarter next year. 

Aside from the projects under development, LVS also owns and operates The Venetian Macao Resort-Hotel, the Sands Macao and the Four Seasons Hotel in Macao. Its key focus is on the mass market, which supposedly has higher gross margins than the VIP segment - the part of the market that Wynn Macau focuses on. The latter listed in Hong Kong last month after being spun-off from the casino group owned by Las Vegas gaming magnate Stephen Wynn. Sands has a more diversified strategy than other five casino license holders in Macau and gets a greater portion of its revenues from leisure and conventions, sources say.

Similarly to Wynn, though, the Macau business is the growth engine within the LVS group and the fact that the company is now getting its finances in place to resume its key expansion project in the former Portuguese colony should put it in a good position to make the most of the recovery in gaming revenues currently underway.

Sands has a waiver that will allow it to sell only 15% of the company, but depending on how many secondary shares will be included in the deal, the final deal size may still be closer to the normal 25%.

Contrary to Minsheng Bank, however, Sands is not likely to solicit the support of cornerstones in its IPO. The reason, sources say, is that the company has recently brought on board quite a number of institutional investors through the sale of a $600 million pre-IPO convertible bond. These investors will be locked up for at least six months, after which they can convert the bonds into shares at 90% of the IPO price. To lock up even more investors for a period of time may undermine the secondary market performance, they say.  

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