Richard Li trims stake in HKT Trust

The chairman raises $161 million on the back of a 75% gain in the share price since listing. An anchor investor takes about 70% of the deal.
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Richard Li: Cutting stake in HKT Trust to about 2.8%
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<div style="text-align: left;"> Richard Li: Cutting stake in HKT Trust to about 2.8% </div>

Richard Li last night raised about HK$1.25 billion ($161 million) from the sale of shares in HKT Trust, the Hong Kong-listed entity that holds the telecommunications business previously owned by PCCW. It was the first sell-down by the HKT Trust chairman, or any other substantial shareholder, through the capital markets since the trust went public in November 2011.

The transaction reduced Li’s direct stake in the trust to about 2.8%, although he also has an indirect ownership through his shareholding in PCCW. The Hong Kong company, which is also involved in media, IT solutions, property development and investments, still owns 63% of HKT Trust. Li is the founder and current chairman of PCCW.

The block trade last night consisted of approximately 163.4 million shares (technically they are share stapled units) in HKT Trust, or about 2.5% of the share capital. They were offered at a price between HK$7.66 and HK$7.82, which translated into a discount of 1% to 3% versus yesterday’s close of HK$7.90.

The discount looked tight, especially when considering that the block accounted for just over 30 days of trading based on the daily volume in the past month. The share price also hit a record high of HK$7.94 on Wednesday this week after gaining 75% since the IPO.

However, the bookrunner had lined up an anchor investor before launch which had agreed to take up about 70% of the deal, leaving less than $50 million worth of shares to place with other buyers. This increased the likelihood that the deal would get done quite substantially and gave other investors the confidence to participate as well.

However, the price was fixed at the bottom of the range for the maximum discount of 3%.

According to a source, the deal was fully covered in about 90 minutes and well oversubscribed when the order books closed. About 90% of the demand, including the anchor order, was said to have come from long-only funds and insurance companies. In all, just under 30 investors came into the deal.

There was no information on who the anchor investor was and whether or not it was a shareholder in the trust already. About 95% of the overall demand came from Asia-based accounts, complemented by a couple of orders from Europe. The deal wasn’t open to on-shore US investors.

The sellers were three entities — Eisner Investments, Pacific Century Group Holdings and Pacific Century Diversified — which are all 100% owned by Richard Li, either directly or indirectly. Before the transaction they held a combined 5.34% of HKT Trust, or about 342 million shares, which they obtained in connection with the IPO.

Li bought all the shares that he was entitled to through the 10% preferential tranche targeted at existing PCCW shareholders and also subscribed to an additional 200 million shares to help get the $1.2 billion IPO across the line. On top of that, PCCW also distributed 5% of HKT’s share capital to its existing shareholders in two batches after the listing, in December 2011 and March 2012, increasing Li’s stake further.

Yesterday’s sale allowed him to monetise part of his holdings after the strong run in the share price since listing. The rest of the shares held by Pacific Century Group and Pacific Century Diversified are locked up for three months. Eisner isn’t subject to a lock-up, but, according to the source, the shares held by this entity account for just a small portion of Li’s remaining 2.8% stake.

After climbing to a high of HK$7.89 in early December last year, HKT Trust retreated to HK$6.73 in the next six weeks, but since then the share price has been on a largely upward trend, making this a good time for Li to take some profit.

HKT Trust was the first trust to list in Hong Kong and in order to fit under the existing listing rules it ended up with a fairly complicated structure, including the share stapled units that have three different components but are traded as one entity. Li initially intended to list the telecom business as a business trust, since that would allow it to pay dividends based on cash flow as opposed to out of its accounting profit.

He was pushing the Hong Kong regulators to put a regulatory framework in place for business trusts, which are already common in Singapore, but the progress was quite slow and in mid-2011 Li and the mandated banks changed course and started working on an alternative structure that would allow the kind of dividends that he was after.

Hong Kong still doesn’t have a listing framework for business trusts, and a number of other Hong Kong-listed companies, including Cheung Kong Holdings, Great Eagle Holdings and Hopewell Holdings, are now looking to copy the share stapled unit structure pioneered by HKT Trust for their planned spin-offs of hotel assets.

In 2012, the first full year of operation since the listing, HKT Trust’s net profit increased by 32% to HK$1.61 billion, while the adjusted funds flow (which is what the dividend is based on) amounted to HK$2.67 billion. Both numbers exceeded the forecasts made at the time of the IPO, by 18% and 4% respectively.

In line with the commitment to pay out 100% of the adjusted funds flow, this resulted in a full-year dividend of 41.64 HK cents per share stapled unit.

Based on that, the placement price values HKT Trust at an historical dividend yield of 5.4%. Investors who participated in the placement will be eligible to receive the final dividend for 2012 (21.58 HK cents per share stapled unit) as that won’t be paid until mid-May.

The placement was arranged on a sole basis by Standard Chartered. The UK-headquartered bank was one of five joint global coordinators for the IPO.


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