Techpacific sells CB to Goldman Sachs

Crosby parent raises cash for re-entry into private equity arena.
Techpacific Capital has sold a $75 million five-year convertible bond to Goldman Sachs in order to raise money partly for an investment into three gas fields in the United States.

The investment is said to signal a desire by the Hong Kong-listed investment company to return to its roots and make more private equity investments alongside its main asset, Crosby Capital Partners. Techpacific, which was founded during the dotcom boom as a technology-focused investment banking firm and later expanded into venture capital and incubation, bought an 81.24% stake in asset management and investment banking firm Crosby in 2001 at a time when tech had lost most of its appeal.

It promptly put its own senior partners in charge, making use of their investment banking backgrounds with key firms like Citigroup, UBS, Nomura and Bear Stearns. Since then, Crosby has been responsible for all the growth within the group, according to TechpacificÆs CEO and co-founder Johnny Chan.

ôThis opportunity to expand TechpacificÆs current businesses beyond being simply an investment holding vehicle for Crosby allows us to ensure that our growth will continue,ö he says.

The bonds will pay no coupon but are redeemable at 116.1%, which translates into a 3% yield to maturity.

Goldman Sachs will pay $72.75 million for the bonds after subtracting a $2.25 million discount, which Techpacific said was comparable to the fee it would have had to pay had the bonds been sold to a wider group of investors with the help of an independent investment bank.

The bonds can be converted into new Techpacific shares at a conversion price of HK$0.7665 per share, which represents a 2.2% premium to the March 3 closing price (the last trading day before the shares were suspended) or 5% premium to the average closing price in the previous five days. However, the CB holder has the option to exchange the bonds for shares in Crosby instead, at a price of ú0.9975 per share, which equals a discount of 1.48% to the March 3 close and a 5.95% premium to the average close in the previous five days.

This unusual conversion structure is due to the fact that a full conversion of the bonds into Techpacific shares would have exceeded 20% of the companyÆs existing share capita. Under Hong Kong regulations this is the maximum it is allowed to issue. At the current conversion price, about 80% of the bond issue can be converted into Techpacific shares.

Meanwhile, Techpacific only has the right to deliver 33.5 million Crosby shares to CB holders who wish to exchange the bonds into the London-listed subsidiary, but will ask its shareholders for approval to hand over a further 9.44 million shares to cover a full exchange into Crosby shares. If this request is not granted, CB holders will have to convert into a combination of Techpacific and Crosby shares.

At the most, Techpacific can issue 559 million new shares, which will account for 16.62% of its enlarged share capital. The 33.5 million shares in Crosby that Techpacific already has the right to sell would account for 13.8% of the existing share capital, while the additional 9.44 million shares would increase that to 17.7%.

In the latter case, TechpacificÆs stake in the company would drop to 63.54%, but it would also make an estimated capital gain of about $56.9 million, based on CrosbyÆs consolidated net asset value as of June 2005, according to a company statement.

The low conversion premium is a clear signal that the company wants to see the bonds convert into equity quickly, and Chan confirmed this last night: ôIf the conversion price had been set higher there would have been less dilution, but it's more important to us that this becomes equity than to have a five-year bond outstanding,ö he comments.

There is an issuer call after two years, subject to a 130% trigger, that could help force an early conversion.

The management is also keen to see Goldman Sachs become a shareholder in the group, although the US investment bank has made no commitment and has the right to sell the bonds to other investors immediately should it wish to do so.

Goldman Sachs declined to comment on the investment last night.

Techpacific plans to use $42.5 million of the proceeds to pay for the investment into three gas exploration projects in Louisiana that are currently wholly-owned by a subsidiary of IB Daiwa. The latter is about 28%-owned by Crosby through shares and warrants.

Techpacific will hold 35% in each of the wells, while IB Daiwa will have 45%. The remainder will be owned by operating partner Pel-Tex, which is also a subsidiary of IB Daiwa.

The negotiations on the deal were at the final stages and are expected to be completed ôwithin 48 hours,ö Chan adds.

While there are no guarantees how much gas the partners will find in these wells, Chan said the company is bullish about the project and expects it will have a positive impact on its earnings. In a written statement, CrosbyÆs CEO Simon Fry notes that the investment by Techpacific means, ôa substantial part of this yearÆs drilling programmes (at the three gas fields) will now be fully funded.ö

The rest of the proceeds may also be invested into the oil and gas exploration sectors, or go into other sectors or working capital.

In 2004, Techpacific posted a net profit of $44.4 million, compared with a net loss of $4.39 million in 2003. This was driven by a similar turnaround in CrosbyÆs bottom-line, which swung to a $38.7 million net profit in 2004 from a $3.90 million loss a year earlier.

The conversion price on the bonds will be reset if TechpacificÆs shares close below HK$0.73, or CrosbyÆs shares finish below GBP0.95 the day after CrosbyÆs 2005 results (scheduled for March 16) and CrosbyÆs revenues failed to reach $120 million. The same would apply if the pre-tax profit is less than $95.32 million or the earnings per share fall below $0.385. The new conversion/exchange price will then be reset at 105% of the volume weighted average price in the first three days after the results announcement.

TechpacificÆs shares, which are traded on Hong KongÆs Growth Enterprise Market, rose 2.67% to HK$0.77 after Goldman SachsÆ investment was announced yesterday (March 8), pushing the gains for the past 12 months to just above 700%. However, the share price is only now starting to get close to its HK$1.05 IPO price from April 2000, which it touched only briefly on the first day of trading before collapsing along with the dotcom bubble.

Between mid-2002 and the end of 2004, the share price lingered pretty consistently below 5 HK cents.
CrosbyÆs share price had fallen 2.3% by late afternoon yesterday in London to ú0.9475.
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