PTT Exploration and Production (PTTEP), the state-backed oil and gas company that earlier this year won the bidding for London-listed Cove Energy, has set the price for its upcoming Bt92.3 billion ($3 billion) preferential public offering at Bt142 per share.
The price translates into an 8.1% discount to the closing price last Wednesday and a 6.9% discount to the theoretical ex-rights price (Terp) based on that same closing price.
Existing shareholders will be able to buy 0.195783 new shares for each share they own now, or just under one new share for every five existing ones, resulting in the issuance of 650 million new shares. The deal accounts for 19.6% of the existing share capital.
The deal will be the largest equity transaction in Thailand ever and almost three times the size of the second largest one, Siam Cement’s overnight sell-down in PTTEP’s sister company PTT Chemical in December 2010, which raised Bt33.04 billion ($1.1 billion). However, the PTTEP transaction has strong support from its controlling shareholder, state-owned PTT, which will take up its 65.29% entitlement in full to keep its current stake unchanged.
The price was set following a one-day bookbuilding exercise last Thursday that attracted both new investors and existing shareholders. However, investors participating in the bookbuilding will only receive shares if there is any paper left after existing shareholders have subscribed to the preferential offering.
It is only the second time that a Thai preferential public offering — which is similar to a rights issue — is combined with a bookbuilding exercise held before the actual subscription by existing shareholders. The first time was for the Tesco Lotus property fund, which has yet to announce the results from the subscription period for existing unitholders that ended last Thursday.
At $245 million, the Tesco Lotus offering is significantly smaller than the PTTEP deal and sources say they believe it will be taken up in full by existing unitholders, leaving no units for the investors who participated in the bookbuilding. PTTEP is a different matter.
Initially bankers involved in the deal argued that at $3 billion there was bound to be at least some shares left to be allocated to investors in the bookbuilding — referred to as a “rump”. However, the response to the bookbuilding was really strong and that is likely to fuel the interest among existing shareholders as well. And with PTTEP’s share price gaining 3.2% to Bt159 on Friday, the price for the preferential share offering also became more attractive.
Sources say they are aware that some existing shareholders will not take up their entitlements in PTTEP’s offering, but there is still no way of knowing even roughly how many shares may be left unsubscribed as shareholders can also put in orders for an unlimited number of excess shares. The only thing investors knew for sure when the bookbuilding took place last week was that PTT will not subscribe to any excess shares. The parent also didn’t participate in the bookbuilding.
In other countries with similar types of rights issues or preferential offerings with a pre-deal bookbuilding, that second round of excess share application typically doesn’t exist. Some of the large existing shareholders may also agree not to take up their portion of the offering to ensure that there are shares left for investors participating in the bookbuilding.
In this case, the bookbuilding could turn out to be meaningless. Sure, one can argue that these investors did determine the price for the preferential share offering, but in reality the price range for the bookbuilding was set by the bookrunners based on feedback they had already received from the key existing shareholders. Also, the difference between the top and bottom of the range was less than 7%.
The shares were offered at a price between Bt135 and Bt145, which translated into a discount of 6.1% to 12.6% versus last Wednesday’s close. Based on the final price on Friday, the discount is now 10.7% versus the market price and about 9.1% versus Terp.
However, the discount is still significantly narrower than would have been the case if the company had done a normal rights issue without the potential involvement of new investors. Typically rights issues in Asia are priced at 20% to 30% discounts to Terp and sometimes even wider. That would have meant that the company would have had to issue more shares to raise the same amount of money, resulting in a much bigger dilution.
PTTEP initially intended to raise the full $3 billion in the open market via a placement, but investors baulked at the size of the deal and PTTEP’s share price fell from close to Bt180 in early July before the company was announced the winner of Cove to a low of Bt148 in early August. This prompted the company to rethink its options and shortly before the extraordinary shareholders meeting in August the company withdrew the placement plan.
The decision to do a preferential public offering instead proved more amenable and the company’s minority shareholders approved the transaction at a rescheduled EGM on October 29.
According to sources, the bookbuilding attracted about 70 domestic and international investors with the demand split roughly half and half between long-only accounts and hedge funds. The order book also included a mix of new investors and existing shareholders. The latter may have participated partly because they wanted to have some influence on the price, partly in order to get shares for funds within their firm that were not on the shareholder registry on the record date (November 12).
But perhaps the most important reason is that existing shareholders will have to put up the full amount in cash if they subscribe to excess shares. In the bookbuilding there is no such requirement. Also, the excess shares will be allocated in proportion to the current shareholding of the participating investors, while in the bookbuilding the shares will be allocated at the discretion of the bookrunners, potentially increasing the chance for major investors to get a larger portion.
In a statement issued Friday, PTTEP’s CEO, Tevin Vongvanich, said the company had received positive responses from the management roadshow during which it met with investors in Thailand, Singapore, Hong Kong and the US.
PTTEP hasn’t specifically said that the money raised will go towards the Cove acquisition, but rather has noted that it will “enable the company to strengthen its capital structure and allow it to achieve its growth plans”. However, pretty much everyone else links the fund-raising to the £1.22 billion ($1.9 billion) acquisition.
Cove’s main asset is an 8.5% participating interest in the greenfield Mozambique Rovuma Offshore Area 1 block, which is majority owned by Andarko Petroleum and has an estimated 30 trillion to 60 trillion cubic feet of natural gas. Cove had no revenues last year and made a loss of about $4 million.
The acquisition marks PTTEPs first foray into the natural gas market in East Africa, but the company said in a circular issued in June that the interest in the Rovuma project represents a strong fit and the acquisition is consistent with its strategy of leveraging the liquid natural gas (LNG) value chain of the PTT group in Thailand.
However, investors worry not just about the cost of the deal, but also about the potential risks of doing business in Africa. Hence, the slide in the share price after Shell walked away from the two-way bidding in mid-July, leaving PTTEP as the sole remaining bidder.
The subscription period for existing shareholders will start today and run until Thursday. Investors who participated in the bookbuilding will be informed whether they will receive any shares on December 7.
The deal is arranged by Bank of America Merrill Lynch, Deutsche Bank, Finansa, Goldman Sachs, J.P. Morgan, Phatra Securities, Tisco and UBS. UBS also advised PTTEP on the Cove Energy acquisition and was the lead arranger for the £950 million bridge loan that was taken up to cover the bulk of the acquisition cost.
