Swire Properties cancels IPO as markets take a beating

The spin-off from Swire Pacific was aiming to raise up to $2.7 billion ahead of a Hong Kong listing, but in light of the sharp drop in equity markets this week, the company says pushing ahead with the deal would be against the interests of shareholders.

Swire Properties yesterday decided to scrap its initial public offering in Hong Kong as global equity markets continued to fall. The IPO had been set to raise between $2.4 billion and $2.7 billion, which would have made it the largest listing in Hong Kong since China Pacific Insurance's $3.6 billion listing in December last year.

The decision came on the final day of the bookbuild and followed a fourth straight day of losses on the Hang Seng Index, which has been partly led by the property developers. The Hang Seng property index, which tracks the performance of seven Hong Kong-based developers, including Cheung Kong (Holdings) and Sun Hung Kai Properties, has fallen 6.4% since the start of Swire Properties' roadshow last Monday and Swire Properties' parent company, Swire Pacific, is down 10.5% in the same period.

And the situation continued to worsen over night when the Dow Jones index closed 3.2% lower even after a significant rebound. At one point in the mid-afternoon the index plunged as much as 9.2%, or almost 1,000 points - its largest intraday loss ever -- as protesters clashed with police in Athens over new austerity measures, adding to concerns that the country's debt problems may halt the global economic recovery.  

In a statement issued last night, Swire Pacific said it had formed the view that it would be "inadvisable" to proceed with the global offering in light of the deterioration in market conditions since it launched the retail offering on Monday this week. As a result, the spin-off of Swire Properties will not proceed and the special divided in the form of Swire Properties shares to existing Swire Pacific shareholders will not be distributed.

"The company is naturally disappointed at this outcome but feels that it would be wrong to proceed with the proposed spin-off given the recent sharp deterioration in market sentiment," Christopher Pratt, chairman of Swire Pacific, said in a written statement. "Consideration was given to amending the terms of the global offering, but it was felt that this would undervalue the world class assets of Swire Properties and be against the interests of the shareholders," he added.

The fact that Swire Properties is fully funded for the medium term meant the management could review the situation without any concerns that the business may suffer if it didn't raise capital at this point.

The decision to withdraw was not entirely surprising since it was clear that Swire Pacific was interested in spinning off its property assets -- essentially the crown jewels in its portfolio -- only if it would help to unlock hidden value. In other words, it wasn't going to sell them too cheap. The price range was set at a level that would have valued the company at a discount of 8% to 16% versus the net asset value, based on the consensus estimates by the joint bookrunners, which compares with a discount of about 10% to 25% for key comparables like Hang Lung Properties, Hongkong Land and Wharf Holdings. And that was before the comps started falling.

Although the aggressive valuation was partly supported by Swire Properties' perceived high-quality and premium brand, the company was not able to shake off the negative sentiment that has taken hold in the markets over the past week, and while the bookbuild started off on a positive note, sources said investors had been withdrawing their orders over the past couple of days.

"It's all about sentiment. There has been a lot of bad news this week and the book just started to melt," said one source familiar with the process.  

And Swire Properties was by no means the only listing candidate to yield to the markets. In Asia-Pacific three other deals where postponed, although in the case of New Century Shipbuilding the ultimate reasons for pulling the deal on the final day was said to have been technical rather than market-related. That said, the Chinese shipbuilder company had already reduced the size of the deal to less than half the original fund-raising plans as the market fell.

Several companies in Europe and the US have also either pulled their IPOs or severely downsized them in recent days. One example is US real estate investment trust Americold, which initially offered its units at between $14 and $16 apiece for an IPO of about $700 million. Having failed to price within that range on Wednesday, it cut the price by 33% at the mid-point and is now offering the shares between $9 and $11.

Swire Properties was due to sell 13.79% of the enlarged share capital in the form of 910 million new shares at a price between HK$20.75 and HK$22.90. This would have allowed it to raise between HK$18.9 billion and HK$20.8 billion ($2.4 billion to $2.7 billion). There was also a 15% greenshoe that could have increased the maximum proceeds to $3.1 billion. All the shares in the base deal were new, while the greenshoe was made up of secondary shares.

The IPO was being arranged by Goldman Sachs, HSBC and Morgan Stanley.

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