Sell-down in Dongxiang prices at mid-point

The $164 million deal comes after an 18% rally in the share price and sees a Morgan Stanley fund offload just over half of its remaining pre-IPO investment.
A block of shares in sportswear designer and retailer China Dongxiang Group, which owns the rights to the Kappa brand in China, was in the market last night and changed hands at a 6.3% discount to yesterdayÆs close for a total deal size of HK$1.28 billion ($164 million). The discount was largely in line with recent Hong Kong deals, but nevertheless encouraging because it represented the mid-point of the indicated range.

The seller was a private equity fund owned by Morgan Stanley, which invested in Dongxiang before its initial public offering in October last year and thus wouldnÆt have been too worried about the fact that the share price is currently trading below the IPO price. The stock is on its way up though and has gained 17.8% over the past five trading sessions, which would have been encouraging to the investors participating in the placement. The gains have come after the company confirmed it would be buying loss-making Japanese sportswear manufacturer Phenix, which owns the Kappa brand in Japan, for Ñ1. When the deal was first flagged in early April, investors werenÆt so sure about the rationale of Dongxiang making a move into another country at this time and its share price came under a lot of pressure. But following a post-earnings roadshow over the past month, the company appears to have convinced investors of its merit.

According to a source, the deal was covered within 20 minutes and when it closed after an hour-and-a-half it had attracted more than 50 investors and pushed up the price limits to the extent that the final price could be set at HK$6.10. The shares were initially offered in a range between HK$3.53 and HK$3.68, which represented a discount of 4.2% to 8.1% over yesterdayÆs close of HK$3.84 and a 9.5% discount to the IPO price of HK$3.98.

The offering was also increased by 18% to 355 million shares from 300 million, although the upsize option was flagged on the initial term sheet. At the final size, the deal represented 6.3% of the share capital and 27 days worth of trading, which is quite sizeable compared with other Hong Kong blocks over the past month. Not surprisingly, given that the seller was one of its own funds, Morgan Stanley was the sole bookrunner for the offering.

The Morgan Stanley fund has been able to sell its shares since early April when the IPO lockup expired, but likely didnÆt feel too inclined while the share price was on a declining trend. After closing at HK$3.12 on April 14 û which was only 9 cents above the all-time low of HK$3.03 from March 20 û the stock started edging higher though, and with the latest gains the seller probably felt there would be a market for the shares. The fund still holds 5.4% of Dongxiang, which will be locked up for another 60 days.

About 90% of the demand came from Asian or global accounts and included a good mix of hedge funds and long-only names. According to sources, many of the same investors who participated in the secondary share placement in shoe manufacturer and retailer Belle International two weeks ago also bought shares last night, which makes sense given that they operate in the same sector. Still, it suggests that individual investors are perhaps getting more active when it comes to participating in block trades.

With regard to the Phenix acquisition, Dongxiang said in a statement that it believes it makes sense since the Japanese company has strong design and development capabilities which will enhance the groupÆs existing operations and provide a ôstrong platformö for its long-term development of the Kappa brand in China. It also plans to launch the Phenix brand of ski and outdoor sportswear in China, which will take it a step on the way towards its aim to become a multi-brand manager. And of course, Dongxiang is confident that its current experience of managing the Kappa brand in China û and its strong financial resources û will enable it to improve the performance of the Japanese company. It noted, however, that the Ñ1 purchase price reflects not only the companyÆs loss in 2007 and the adjusted net asset value, but also a general deterioration in the operating conditions.
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