The Shangri-La group made a rare foray into the international capital markets yesterday (Monday) with a concurrent convertible and share placement. With JPMorgan as lead manager, the group raised $200 million from the convertible (no greenshoe) and $175 million from the placement, although the Kerry group, which owns 45% of the company, took up $85 million of the latter.
The timing and structure of the deal was determined by the group's desire to raise funds for its expansion into China, maximise maturity and do so while interest rates remain at historic lows. However, it did not want to stretch gearing levels and, therefore, opted for an equity-linked structure in the face of a share price and occupancy levels that have remained fairly resilient to bird flu.
Both sides of the offering were launched about two hours after the market's close and the combination of two together with a timetable that ran slightly later than scheduled, means the stock is not likely to resume trading until Wednesday.
The share placement had a modified top up structure, with the Kerry group outlaying $175 million upfront and then subscribing for $85 million of the offering. A total of 183 million shares were sold at HK$7.40, which represents a 7.5% discount to the stock's HK$8 close on Monday. This was the widest end of the marketed range between a 5% and 7.5% discount.
Books are said to have closed two times covered, with participation from about 40 accounts and a 25% overlap with investors in the CB book. Most of the stock is likely to be allocated to Asia, with relatively small distribution to Europe and even less to the US, where there was a small 144a allocation.
The equity deal on its own will dilute existing investors by 8.4% and in tandem with the convertible by 15.8%. The placement represents a fairly weighty 56 day trading volume.
Terms for the convertible comprise an issue price of par, zero coupon and redemption at 114.633% to yield 2.75%. There is no put option on the five-year deal, but a three-year call at 120%. Again this marked the widest end of a pre-marketed range between 2.25% to 2.75%.
The conversion premium was marketed between 25% and 30%, with pricing at 25%. For a five-year, non tech play, this is fairly reasonable. Year-to-date, the stock price is up 9.59% and 46.68% on an annualised basis.
It is currently trading on a 2004 PE of about 19 times. Its main comparable, HK & Shanghai Hotels, is trading around the 23 times mark, but is more heavily geared to Hong Kong, while Shangri-La has a much greater pan Asian focus.
Underlying assumptions for the convertible show a bond floor of 89.8%, implied volatility of 33.5% and a theoretical value of 102%. This is based on a credit spread of 135bp over Libor, 5% borrow cost, 1.4% dividend yield and 40% volatility assumption.
The dividend yield is complicated by the fact the company did not pay an interim dividend in 2003 because of SARs. The dividend assumption has, therefore, been based off 2002 and 2001 numbers, with an adjustment if it rises above 125% of the dividend paid in FY2001.
Unlike many Hong Kong-listed stocks, there is very little borrow available, but plenty of asset swap. However, observers report that accounts were only asking for about 25% to be swapped and were mainly happy to take the deal on an outright basis, although the book was highly price sensitive because of the long tenor.
Books closed three times covered, with participation by roughly 50 accounts.
Shangri La is said to have been particularly keen to extend the maturity, but did not want to access the debt markets because it is keen to keep net gearing around the 35% level. The last time it completed a convertible was back in 1993 via Goldman Sachs.
The group, owned by the Kuok family, has a fairly ambitious expansion plan to increase room numbers by about 16% over the next couple of years. During the second half of 2003, the group had stakes or managed 37 hotels that have a combined total of 19,000 rooms.
Its project pipeline includes hotels in Xian, Changzhou, Chengdu, Guilin, Guangzhou, Nanjing, Shenzhen, Wenzhou and Shanghai. Outside China, the list incudes Dubai, Muscat, Doha and Villingili Island in the Maldives.