At the beginning of 2001, few would have expected Thailand to produce one of the largest initial public offerings of the year. And certainly at the start of PTT's roadshows, no one, least of all the lead managers, thought the transaction would prove such a smooth ride, with international books closing six times oversubscribed.
The Thaksin government has managed to successfully clear Thailand's largest privatization by a wide margin and the Kingdom's fourth largest equity offering behind the three large, post crisis, bank recapitalizations for Bangkok Bank, Siam Commercial Bank and Thai Farmers Bank. Raising proceeds of $631 million pre-greeshoe ($726 million post shoe), PTT beats Krung Thai Bank's $269 million IPO as the largest government sell-down to date. With a market capitalization of Bt98 billion, it also now becomes the third largest company on the Stock Exchange of Thailand (SET) behind Krung Thai Bank and AIS and accounts for 8% of overall market capitalization.
Generating international interest in Thai equity and kickstarting the privatization programme have been the Thaksin government's two key objectives. Consequently, it was decided not to initiate full clawbacks from the international tranche despite domestic political pressure to appease unsatisfied retail demand.
Pricing yesterday (Wednesday) saw the issue of 750 million primary shares and 50 million secondary shares, of which international investors were allocated 286 million (36%) and domestic investors (64%). The deal initially had a 40%/60% split and although there was leeway to swing 15% either way, the five lead managers decided to institute a clawback of only 4.25%. A greenshoe of 120 million secondary shares will also be placed on a pro-rata basis.
Led by Credit Suisse First Boston, Lehman Brothers Merrill Lynch and Phatra Securities, SCB and Tisco Securities, pricing came at the top end of a Bt31 to Bt35 indicative range. Bankers report a total of about 200 investors in the international book, with a split that resulted in 25.5% being placed in the US, 38% in Asia and 36.5% in Europe.
About 20% of the book was said to comprise dedicated Thai funds, with new money accounting for the 80% balance. Lead managers commented that one of the most interesting aspects of the distribution pattern was the number of 10% orders, amounting to about 25 accounts.
"We knew the dedicated Thai funds would come in and hoped to top up the book with some regional funds and a couple of global oil and gas funds," says one banker. "What was particularly pleasing was the number of $30 million, $40 million, $50 million orders from the big sector funds in the US."
Given that average daily trading volume on the SET is only ever $120 million at best, selling out of such a large position would be difficult. Bankers, therefore, argue that the presence of such accounts underlines renewed long-term interest in Thailand, rather than a view that PTT is a momentum trade on the back of huge retail demand.
Where domestic books were concerned, 50% was allocated to five commercial banks, which placed paper with retail investors on a first come first served basis - and sold out of stock within a record 85 seconds. A further 30% was allocated to brokers and the remaining 20% to domestic institutions, with the latter book closing three times oversubscribed.
For many observers, the next important hurdle will come should the stock perform in the secondary market and retail investors, driven by absolute price considerations, start to sell out. However, as one banker puts it, "The most important thing here is that this stock yields 5.7% or about 11% on an annualized basis. Bank deposits in Thailand currently yield 2.5%. Retail investors also have the incentive to hang on to the stock, because the dividend doesnÆt get paid out until April next year."
For institutional investors, there were said to be three main selling points. "Firstly, there are the defensive aspects of PTT's gas transmission business which provides utility like returns," one banker explains. "Upside comes from the upstream business under PTTE&P in which PTT owns a 61% stake. On the other hand, downside is limited because the downstream operations were written-off in the valuation and investors get a free option for when the cycle turns."
A $400 million cash obligation to support PTT's downstream petrochemicals and refining subsidiaries should they require additional finance was also zeroed out.
In according PTT a Bt130 billion DCF valuation, bankers say that a 25% holding company discount was factored into the initial valuation and a further 25% to bring the company to its market capitalization of Bt98 billion. On a EV/EBITDA basis, they also add that the company was priced at 4.6 times 2002 earnings.
Some observers had expected selling pressure on PTTE&P as investors moved out of the subsidiary into the cheaper parent. Yet over the course of roadshows, the reverse happened with PTTE&P rising from about Bt98 at the beginning of November to Bt108 at the time of pricing. Year-to-date, the stock is also up 8% in line with the SET, which has risen 8.18%.
Because the deal was largely structured as a primary share issue, proceeds are being used by PTT itself, which hopes to pay down debt. The company currently has liabilities of $2.85 billion, a large portion of which was incurred post crisis for the bailout of government-owned subsidiaries including Thai Oil and Bangchak Petroleum.
Having got the privatization programme off to the best possible start, bankers are now hoping that the government does not throw away any momentum by choosing a poor candidate to follow PTT. "The Thaksin government has pitched this deal perfectly," one observer concludes. "The government didn't get too greedy when things started to go well and it has offered a compelling valuation. Institutional and retail investors will now continue to chase the stock in the secondary market."