Spin-off IPOs start to look like a trend

Pre-marketing gets under way for SMC Global Power in the Philippines and Parkson Retail Asia in Singapore, while Noble Group plans for a separate listing of its agricultural business.

One positive day certainly doesn’t make a stable market, but the many listing candidates in the Asian pipeline must have felt some relief yesterday as the recent equities sell-off gave way to at least one session of sizeable gains.

After five straight days of losses, the Singapore Straits Times Index added 2.9%, and in Hong Kong, where markets were closed on Wednesday, the Hang Seng Index rallied 5.7%. The gains, prompted by an improved outlook for exporters in the wake of better-than-expected US data and a growing belief that European leaders will come up with a solution to the debt crisis, sparked renewed hopes that the fourth quarter may turn out okay after all.

However, the optimism was kept somewhat in check by the Hong Kong trading debut of Citic Securities, as the stock fell as much as 10.5% below its IPO price before recovering late in the day to finish unchanged at HK$13.30. The company’s Shanghai-listed shares had fallen 4.7% since it fixed the Hong Kong offering price last Wednesday, but people had been hoping that the small number of H-shares allocated to retail investors and good interest from long-only accounts would help support the stock in the secondary market. As it was, the debut was less than convincing and is unlikely to be the hoped-for trigger that will make investors more confident about investing in market newcomers.

Even so, bankers continue to test the waters through the pre-marketing of more deals. These days, however, the launch of pre-marketing is by no means a guarantee that a formal roadshow will follow — at least not immediately. That depends entirely on the response during pre-marketing and how much demand the banks are able to secure before launch from cornerstone or anchor investors.

Spin-offs seem particularly popular at the moment, perhaps because issuers hope the track record of the parent will make people more inclined to invest in one of the operating units. Typically investors are also already familiar with the business that is being spun off, which means it is easier to get their attention. And for the parent company, a spin-off might uncover hidden value that could help lift a depressed share price.

As reported earlier, PCCW is in the process of preparing for a spin-off of its telecom business and Swire Pacific is aiming to list its properties business by introduction following a distribution of shares to its existing shareholders. And on Monday this week banks started pre-marketing for two more — SMC Global Power Holdings Corp, which is being spun off from Philippine conglomerate San Miguel Corp, and Parkson Retail Asia, which is part of Malaysia’s Parkson Holdings and is seeking a separate listing in Singapore.

Adding further to the list, Singapore-listed supply chain manager and commodities trading company Noble Group said in an announcement late Tuesday that it has filed an application for a possible spin-off and primary listing of its agriculture business in Singapore. Various media reports suggested the value of this business could be as high as $4 billion to $5 billion, but Noble stressed that no final decision has been made whether to go ahead. The timing, it said, will depend, among other things, on market conditions.

SMC Global Power and Parkson Retail Asia are both planning for at least two weeks of pre-marketing before making a decision of whether to launch a formal roadshow. Based on an indicated price range of Ps44 to Ps71 per share in the listing application, SMC Power could raise up to Ps27.3 billion ($620 million) from the base deal, although an actual price range won’t be set until the end of pre-marketing. Parkson Asia is expected to raise around $200 million.

SMC Global Power
SMC Power is coming on the heels of an initially successful Philippine IPO for supermarket and hypermarket operator Puregold Price Club, which raised $172 million on the back of positive sentiment for consumer retail plays. However, the stock fell 12% when it started trading on Wednesday and dropped another 2.9% yesterday, again underlining the limited interest in market newcomers among investors in general.

SMC Power doesn’t operate in a sector with the same positive outlook as Puregold, but as an independent power producer, it is a fairly defensive stock — something which may appeal to investors as global markets remain volatile and headline-driven. Although the company only entered the power industry in 2009, it already has a 17% market share of the power supply to the national grid and a 23% share of the power going into the grid on the main Philippine island of Luzon.

SMC Power believes it has “a strong platform to participate in the expected future growth of the Philippine power market, through both the development of greenfield power projects and the acquisition of existing power generation capacity.”

It currently has three power plants with a combined capacity of 2,545 megawatts, but is aiming to expand its capacity by up to 3,000MW through greenfield power projects during the next 10 years. Specific plans include two coal-fired circulating fluidised bed power projects with a total capacity of 450MW that are in an advanced stage of planning.

It is also preparing to bid for selected power generation plants owned by National Power Corp that are about to be privatised.

At the same time, SMC Power intends to become a more vertically integrated company by expanding both upstream and downstream. It has already bought coal exploration, production and development rights over approximately 17,000 hectares of land in Mindanao and intends to capitalise on regulatory changes to expand its sales of power to a broader range of customers, including retail customers.

Aside from the general market environment, a key challenge for SMC Power will be the size of the deal at the top end of the indicated terms — the entire Philippine stock market only trades about $80 million worth of shares a day. However, the company and its bookrunners have quite a lot of flexibility with regard to the size as the indicated ranges are quite wide. The base offer will comprise between 290 million and 385 million shares, and if it sells the minimum number and the price ends up towards the bottom of the indicated range, the size will be about Ps12.7 billion ($289 million). The deal also comes with a 15% greenshoe.

The flip side of this is that SMC Power should be a big liquid stock, and as such should appeal to global funds looking to increase their exposure to the Philippines. The expectation is that up to 80% of the offering will be targeted at international investors. The company is currently wholly-owned by San Miguel Corp, whose other businesses include food, packaging, oil, infrastructure, telecommunications, banking, property and, of course, beer.

CIMB, Goldman Sachs, Standard Chartered and UBS are joint bookrunners, while the domestic portion of the deal will be handled by ATR KimEng and SB Capital Investors.

Parkson Retail Asia
Parkson Asia offers the same direct exposure to retail consumers as Puregold and other recent IPOs such as tea retailer Tenfu and supermarket and department store operator Sun Art Retail in Hong Kong, or supermarket chain Sheng Siong Group in Singapore. Those companies all attracted good demand from institutional investors and Parkson Asia will be aiming to bank on that same pool of investors by offering exposure to a different set of markets. Being a department store operator, Parkson Asia is also targeting a slightly higher-end consumer than the supermarket chains.

The company, which is 90.1%-owned by Kuala Lumpur-listed Parkson Holdings, operates department stores in Malaysia, Indonesia and Vietnam and is also in the process of developing its first store in Cambodia, which is set to open in 2013. According to a source, it is the second largest department store operator in Malaysia with 36 stores and a market share of roughly 20%. It entered the Indonesian market earlier this year following the acquisition of Centro Retail, which provided it with six stores.

Perhaps to underline its broad exposure to Southeast Asia, Parkson Asia has decided to list in Singapore as opposed to joining its parent company on the Bursa Malaysia. Similarly, Parkson Holdings’s department store business in China is listed in Hong Kong under the name of Parkson Retail Group. The spin-off of the Southeast Asian business will turn the parent into a holding company with significant interests in the Hong Kong- and Singapore-listed units. It stake in Parkson Asia will drop to about 64% following the IPO.

According to a circular issued last week, Parkson may sell new shares corresponding to up to 18.9% of the enlarged share capital, while the parent company and a private investor that owns the remaining 9.9% of the company can sell shares representing up to a combined 14.5% of the enlarged share capital. However, the source said the current plan is for the base offer to amount to about 25% of the enlarged share capital with the majority of the shares being new. There is also a 15% greenshoe.

Parkson Asia has noted that the proposed listing will provide the company with direct access to the capital markets, which should give it more financial flexibility to pursue growth opportunities. It is also expected to raise the profile of the company in the regional retail industry.

Parkson Asia is being brought to market by CIMB and HSBC as joint global coordinators and bookrunners. CLSA is a co-lead.

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