Tonic returns with acquisition-related placement

The $248 million deal, which is part of a backdoor listing of some of China Merchants Group’s real estate assets, is priced at the bottom of the range for a 22.3% discount to the latest close.

Tonic Industries Holdings, the Hong Kong-listed shell company that was bought by China Merchants Property Development last year, has raised HK$1.93 billion ($248 million) from an accelerated placement.

The money will be used to pay for part of a HK$6.69 billion acquisition of properties from its new parent company that was first announced in April. The placement will also ensure that the free-float is maintained at 25%.

Tonic initially did a $228 million placement in late June that was conditionally allocated subject to an approval from existing shareholders. However, just before the extraordinary shareholders meeting in early July, the company announced it lacked the land use rights for one of the properties, which resulted in the acquisition being called off and the placement being cancelled.

After securing the missing land use permit in late July and adding three other small properties to the acquisition (for a total of 11 properties), Tonic returned to the market after the close of trading on Monday.

This time around, supposedly in order to reduce the risk for investors taking part in the placement, the company had sought the approval for the acquisition and placement from its independent shareholders in advance. In a statement issued around the time of the launch, Tonic said that approximately 98.1% of eligible shareholders had voted in favour at an EGM held earlier on Monday.

Even so, it seems investors were not as keen on the placement as they were in June, when the order book was rumoured to have been heavily skewed towards long only funds and real estate specialists. According to a source, the demand for Monday’s transaction was more mixed and included corporate investors and hedge funds as well as long-only accounts.

One reason may have been that the relatively immediate settlement of the deal this time around made it significantly more hedge fund-friendly. However, the feedback from the recent management roadshow suggested that some investors also thought the valuation was a bit rich.

Indeed, while there was enough demand to get the deal across the line, sources said investors were highly price sensitive, which resulted in the price being fixed at the bottom of the indicated range.

Tonic offered approximately 939.76 million new shares at a price between HK$2.05 and HK$2.30, which translated into a discount of 12.9% to 22.3% versus Monday’s closing price of HK$2.64.

The wide discount can be explained by the fact that the deal is highly dilutive for existing shareholders and that because the share price has yet to adjust to a level that properly reflects its new business focus.

Before the acquisition of the 11 properties from China Merchants Property, Tonic was a small investment holding company involved mainly in the manufacturing and trading of electronic consumer products. It will now become a real estate group with sizeable holdings in China and a focus on the development, sale, leasing, investment and management of properties.

The source noted that while the placement price equals a 22.3% discount to the latest close, the discount to the consensus net asset value (NAV) is only about 15%. By comparison, the two Chinese property companies that have just completed their initial public offerings in Hong Kong were priced at discounts to NAV of 62% and 67% respectively.

Tonic’s share price reached a high of HK$3.47 on May 31 and has been moving largely in a range between HK$2.55 and HK$3.30 since then. Before it was acquired by China Merchants Property it was trading well below HK$1 and until early January this year, it was still below HK$2.

The non-completed deal in June was priced at HK$1.888 per share, which translated into a discount of around 36% versus the market price at the time. The company was looking to sell the same number of shares, which would have meant total proceeds of about $228 million. The difference between that and the $248 million raised on Monday is roughly equal to the 8% increase in net asset value as a result of the addition of three more properties.

Monday’s placement accounts for close to 88% of the total shares outstanding before the issuance of new shares to pay for the property acquisition and about 19.2% of the enlarged share capital following the placement and the issuance of new shares to China Merchants Property.

The deal was said to be more than 1.5 times covered at the bottom of the price range but with the demand falling away quite quickly above there. Close to 50 investors came into the transaction but the top-10 accounts were allocated almost 70% of the deal, according to a second source. In all, about 60% of the shares went to long-only funds.

The order books opened at 4:15pm Hong Kong time and closed at 9pm.

China Merchants Property is the real estate flagship of the China Merchants Group, which is a wholly state-owned enterprise. A key purpose for its acquisition of Tonic and the injection of properties into it is for the group to gain access to the international capital markets, which has become almost a necessity in recent years as China has restricted the ability for real estate companies to borrow from domestic banks.

The Hong Kong-listed company will be China Merchants Property’s only overseas-listed business platform and the parent company has earlier said that it intends to change the name of the company from Tonic to China Merchants Land to provide it with a new corporate image and reflect its new business strategy.

In the eyes of the Hong Kong stock exchange, the injection of the 11 property projects is large enough for the deal to be treated as a reverse takeover and as a result, Tonic has had to seek a new listing approval. According to a circular published a couple of weeks ago, that approval is already in place.

The 11 property projects are at various stages of development and located in the Chinese cities of Foshan, Guangzhou, Chongqing and Nanjing. Tonic will own between 25.5% and 51% in each of these projects, which comprise residential as well as integrated residential and commercial properties.

As part payment for the acquisition, Tonic will issue approximately 2.9 billion new shares to China Merchants Property. Following that share issue and the placement, the parent company’s stake in Tonic will increase to 74.35% from about 70.2%.

China Merchants Property’s acquisition of Tonic and the injection of the properties is part of a recent trend that has seen several other Chinese real estate companies acquire shell companies in Hong Kong to gain access to an international financing platform. Among them are Cofco Land, Vanke, Gemdale and the Dalian Wanda Group.

In September, Hong Kong Parkview Group said it will buy 12 property projects from Cofco Land, which became its controlling shareholder in July last year, subject to shareholders’ approval.

The total acquisition cost is about $1.8 billion and similar to Tonic, Parkview is planning a share placement of at least HK$4.64 billion ($600 million) to maintain the free-float at 25%. The money from the placement won’t be used to pay for the acquisition though, but will go to the company and help fund its future operations and project developments.

Goldman Sachs, which arranged Tonic’s cancelled placement in June was a bookrunner for the latest deal as well, although this time it was accompanied by China Merchants Securities and Citi. ING Bank is acting as a financial adviser to the subsidiary of China Merchants Property that is selling the properties.

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