Private equity firms trim stake in Lenovo

The $368 million placement is completed at a 6.5% discount. The company's share price drops 7.1% in response.
Three private equity investors have trimmed their combined stake in Lenovo Group by about one-third through a joint placement, raising a total of HK$2.86 billion ($368 million).

Shares in the Chinese computer manufacturer fell beyond the placement price yesterday following the Tuesday evening transaction, but a source close to the deal say investors welcomed the chance to get into the stock after the company said its net profit almost tripled in the three months to September. Since the earnings release a week ago, several analysts have been revising up their target prices for the stock, but the share price has been very volatile, making it difficult for investors to buy a sizeable stake.

ôThe market as a whole has been very choppy and [Lenovo's] stock has had no real chance to perform on the back of the earnings, so this was a good opportunity to buy in,ö the source says.

The entire transaction, which accounted for about 4% of the share capital, was said to have been covered 1 hour and 15 minutes after the launch at about 5pm Hong Kong time on Tuesday, although the books were kept open into the Hong Kong evening to give US investors a chance to come into the deal. The order book was dominated by Asian accounts, however, and ended up about 1.5 times covered. Just over 50 investors participated, including some existing shareholders who put in good-sized orders.

The shares were sold by private equity firms Texas Pacific Group (TPG), Newbridge Capital and General Atlantic, who bought into Lenovo in 2005 through convertible preference shares and warrants. Before this sale, they owned about 12.3% of the company.

They offered approximately 350 million shares at a price of between HK$8.16 and HK$8.33, which translated into a discount of 4.6% to 6.5% to TuesdayÆs close of HK$8.73. The final price was set right at the bottom of that range for the maximum 6.5% discount. The deal was arranged by Goldman Sachs.

Other investors responded by pushing the share price 7.1% lower yesterday to HK$8.11, leaving it 0.6% below the placement price. The drop came as the broader market gained 0.9%, but Lenovo's stock is still trading in historic high territory. Before rallying 8.6% to HK$8.73 last Wednesday in anticipation of a strong earnings report, the stock had only closed above HK$8 on two occasions. It reached a record closing high of HK$8.74 last Friday, and before the placement, it was up 176% year-to-date.

The sale by the three private equity firms shouldnÆt have come as a surprise to the market as the firms were regarded as financial investors who bought into Lenovo to help strengthen its financial position in connection with the takeover of International Business MachinesÆ personal computer division. IBM, which received Lenovo shares as part-payment for its PC unit, has already sold down its stake twice through separate placements in February and May of this year.

Back in 2005, TPG, Newbridge and General Atlantic paid a combined $350 million for the convertible preference shares and warrants, which were both convertible into Lenovo shares at a price of HK$2.725 per share, suggesting the three firms have made a handsome profit on their investment. Their remaining stakes will be locked up for another 60 days.

The three months to September saw the companyÆs net profit grow 178% to $105.3 million from $37.9 million a year earlier on a 20% rise in sales revenues. The gain to the bottom line was largely due to improvements in gross margins and operational efficiency, as well as the continued weakness in the US dollar, it said.

Lenovo also noted that in the first six months of its current fiscal year (which ends March 31,2008), its worldwide PC shipments increased by approximately 23% year-on-year, which was better than the industry average growth of about 15%. Based on preliminary industry data, the Chinese computer maker said it had gained 0.6 percentage points in market share, giving it 8.2% of the worldwide PC market during this six-month period.
¬ Haymarket Media Limited. All rights reserved.
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