WH Group has scrapped its revised Hong Kong listing after the Chinese pork giant was unable to get the valuation it wanted, having hoped to raise up to $1.9 billion from the share sale.
The company's original proposal would have potentially raised $7.2 billion, making it the biggest initial public offering of shares in Asia since AIA’s $20 billion flotation in 2010. But the size of the deal was slashed last week after WH Group refused to accept pricing at the bottom end of its indicative range.
The pork group had hoped a smaller deal size would enable it to get a better share price that was closer to analysts’ fair value estimates.
The primary share offer was halved to 1.3 billion shares, or 10% of the group’s enlarged share capital, while a secondary share tranche was dropped altogether. A six-month lock-up was also included to appease institutional investors worried that the company’s high number of private equity shareholders would sell out as soon as market conditions allowed.
Pricing remained the same at HK$8 to HK$11.25 per share. This represented P/E valuation of 13.9 to 19.3 times estimated 2014 earnings, some way below analysts’ fair value estimates of between 19 and 23 times.
Initially, it looked like WH Group's late gambit might pay off. The syndicate reported strong demand for the restructured deal and decided to close the order book a day early.
However, all the demand again came in at the bottom end of the pricing range, in part due to weak market conditions.
The Hang Seng China-Affiliated Corporation Index, or Red Chip Index, is down 8.5% year-to-date, underperforming developed market indices such as the S&P and FTSE 100, which are more or less flat over the same time period.
The deal would probably have got done in a bull market, but the uncertain market conditions led investors to focus instead on the company’s risk factors.
Show me the integration
Chief among these is the lack of integration between WH Group's Chinese pork business and its US pork operations under Smithfield Foods, which WH Group purchased last year. Fund managers believed better integration would provide more clarity about how the company would generate future value.
“They [WH Group] rushed into the IPO and didn’t spend time to actually create the synergy between the US and Chinese businesses,” one fund manager told FinanceAsia. “They wanted to float the stock to fund the acquisition and also let the private equity firms exit. If WH Group is that good, then ride with me. Why should I buy when you’re selling?”
These private equity investors include Shanghai-based CDH, which owns 33.7%, plus Goldman Sachs, Temasak and New Hope.
The failure of the IPO leaves WH Group with a decision to make about its debt gearing, which stood at 286% of its equity capital at the end of 2013. The company had initially hoped to use $4.5 billion of the IPO proceeds to repay the debt it took on to buy Smithfield, including a $4 billion three-year syndicated loan, $389 million in unsecured senior notes and $158 million of Smithfield’s inventory revolver.
No timeline has been set for a future IPO, a WH Group spokesman said.