The market had been watching for a placement in Macau casino operator Galaxy Entertainment for months, but when a transaction finally hit the market yesterday morning it wasn’t private equity firm Permira that was selling. It was another shareholder.
The identity of the seller wasn’t disclosed, but the size of the deal — about $140 million or 1.2% of the company — and the fact that it was a clean-up trade quickly dispelled any thoughts that it might be Permira, since it still owns about 12.8%. The UK-based firm offloaded part of its holdings in Galaxy in September last year and there has been speculation that it would return to the market ever since its latest lock-up expired in early December.
But so far it has kept its cool and has watched from the sidelines as Galaxy’s share price has continued to edge higher.
The fact that it was a different seller didn’t stop the deal from generating a lot of interest from investors, however. And even though the deal was launched at 8am Hong Kong time and stayed open for only 45 minutes, sources said it attracted more than 80 investors. The bookrunners were also able to fix the price at the mid-point of the range.
The seller offered 50 million shares, which represented its entire remaining stake and about three days of trading volume, at a price between HK$21.70 and HK$21.90. The price range translated into a discount of 3.5% to 4.4% versus Monday’s closing price of HK$22.30.
The price was fixed at HK$21.80 for a 4% discount and a total deal size of HK$1.09 billion ($140 million). Given the early hour, the demand was skewed towards hedge funds, but the sources said there was also decent demand from long-only accounts both from Asia and the US.
About 10 minutes before the closed the books, joint bookrunners Citi and Goldman Sachs went out with a message that the deal would price at the mid-point, which confirmed to investors that the deal would get done and that it was oversubscribed. That prompted a bit of a scramble as investors came back and increased their orders to make sure they got their desired allocation, and in the end, the deal was said to have been about three times covered — demand inflation included.
Even so, it was a strong outcome for a deal done pre-opening. Sources said the bookrunners had some colour on potential buyers before launch, and a pickup in short-covering on Thursday and Friday last week following a record high close on Wednesday helped create some “natural” demand. But in addition to that, high-beta gaming stocks are pretty popular right now and Galaxy itself has been outperforming its Macau peers since it reported a strong set of earnings in March. As of yesterday morning the stock was up 60% since the beginning of this year.
Yesterday, Nomura singled out Galaxy as its top-pick among the Macau gaming stocks for three reasons: robust growth potential; improving fundamentals, including a shift in its earnings mix away from the VIP segment and towards the higher-margin and more sustainable mass-market and non-gaming segments; and an attractive valuation at 15 times 2012 earnings. The bank also raised its target price to HK$29.
The sale came on the back of a 4% drop in Galaxy’s share price on Monday, which was a pretty poor day across Asian markets. It also followed a sell-off in Europe and the US overnight. However, the Dow Jones index had edged gradually higher during Monday’s session and in the early hours of yesterday morning, the Hang Seng Index future that is traded in the US pointed towards a slight bounce in Hong Kong trading yesterday, providing a slightly better backdrop to the transaction than if it had been launched immediately after the close on Monday. Supposedly that was enough to convince the bookrunners that there was a window to do a trade.
And that seems to have been the right call. The Hang Seng Index did finish 0.3% higher yesterday and Galaxy’s share price also held up well, falling just 1.8% to a close of HK$22.30 — well above the placement price.