Shares in Tencent stayed afloat on Friday following a massive selldown that saw its biggest shareholder cut its stake for HK$76.9 billion ($9.8 billion) overnight, underlying public investor support for the tech giant despite less-than-satisfactory operating results for last year.
The Chinese tech giant pared losses for nearly the entire trading day, and eventually closed 4.4% lower at HK$420 – a better-than-expected outcome for many investors that participated in the record-breaking block trade a day earlier.
The outcome looked even better in the context of a global stock market that was overshadowed by fears of a trade war between China and the US. Hong Kong’s Hang Seng Index plunged 2.5%, while Shanghai lost nearly 3.4% and Japan slid 4.5%.
Trading in the blue-chip company was the centre of global attention on Friday after Naspers sold 2% of Tencent's outstanding share capital, the first time it has cut its stake since investing in 2001, when Tencent was a little-known Chinese start-up.
The South African media group took almost no time to sell the stake after Tencent announced a disappointing set of full-year operational result on Wednesday, including slower-than-expected top-line growth due to weaker revenue from its best-selling mobile game, King of Glory, as well as an expected slowdown in the growth of QQ and Wechat’s user base.
Shares in Tencent had already fallen 5% on Thursday, wiping $28 billion off its market value.
A 2% stake sale would have been trivial for an ordinary company. However, it was a different case for Tencent, Asia’s most valuable company, which had a market cap of $532 billion before the transaction.
In fact, the block sale was the biggest ever follow-on offering in Asia ex-Japan, overtaking Bank of China’s $9 billion dual-tranche rights issue in Hong Kong and Shanghai in 2010.
Many would have recalled a similar transaction of Softbank selling $5 billion of mandatory exchangeable securities into Alibaba two years ago. Still, Thursday’s trade was arguably more difficult to execute since it was almost double the size, and was brought to the market at a time when investors were turning cautious amid trade war worries.
The joint bookrunners – Bank of America Merrill Lynch, Citigroup and Morgan Stanley – faced significant headwinds for underwriting a transaction of such gigantic scale, according to a source familiar with the situation.
The short notice from Naspers also suggested they had limited visibility on demand in the early stages of the bookbuild.
In face of these risks, the trio launched the trade late Thursday afternoon without an official price range, which literally allowed more flexibility in price discovery and limited the downside in secondary trading.
According to the source, it was only in the later stage of the bookbuild that the underwriters started guiding investors around a 9% discount to Tencent’s HK$439.4 Thursday close.
Naspers has also made a non-binding pledge to hold onto its remaining 31.2% stake in Tencent over the next three years, which was on top of its legal-binding agreement of a six-month lock-up.
The 190 million-share deal was eventually priced at a 7.8% discount to Thursday’s closing price, or HK$405 per share. This is likely to serve as an important indicator for Tencent’s secondary trading in the future as it is the only block sale since its initial public offering in 2004.
Paul, Weiss, Rifkind, Wharton & Garrison LLP were international legal advisors to Naspers. Webber Wentzel was its South African legal advisor.