Three private equity firms last night sold their remaining stake in Chinese PC maker Lenovo Group at a tight discount of just 1.4% versus yesterday’s close. The trade, which totalled HK$1.54 billion ($198 million), came after the company reported strong earnings for the second quarter and on the back of a 25% gain in the stock since late August.
The vendors were TPG, Newbridge Asia (an Asian affiliate of TPG) and General Atlantic, which teamed up to buy into Lenovo in 2005 to help strengthen the Chinese firm’s financial position at the time of its takeover of International Business Machine’s PC business. This was their fourth sell-down, although all three firms haven’t participated in every transaction.
Being a clean-up trade, one could expect investors to be reasonably keen to pick up the shares on account of a potential overhang being removed, and the aggressive bidding for the mandate by the winning bank – Nomura -- suggests that it too believed this to be the case. And while some market players argued that the discount range of 0% to 1.4% was too tight, it did appear last night as if all the shares had found buyers.
The bookrunner offered the deal to a targeted group of investors who like the company’s fundamentals and were happy to buy it even close to market price. A large portion of the deal, perhaps as much as half, was said to have been picked up by existing shareholders and, according to a source, almost all the stock also went to long-only investors, which wasn’t exactly surprising giving the thin discount. However, a few hedge funds did participate, their interest potentially related to a pickup in short-selling in the final hour of trading yesterday when the market caught wind of the upcoming trade.
At the end of the afternoon session the short selling in this particular stock had jumped to HK$52.2 million; at lunchtime short selling activity registered just HK$19.4 million.
The total number of buyers was smaller than usual for a block this size, but even so, there was decent interest both from onshore US investors – the books were kept open until about 11pm Hong Kong time to capture any potential buyers on the West coast -- and Asia, with European investors less interested, the source said.
At 2.9% of the company and seven days worth of trading volume, the deal was quite small, which likely helped in terms of finding enough buyers. On the other hand, the small size would have lessened the impact of this being a clean-up trade.
The three sellers offered 282.263 million shares at a price between HK$5.451 and HK$5.53, with the latter price being equal to yesterday’s close. However, the final price was fixed at HK$5.451 for the widest discount.
Back in 2005, TPG, Newbridge and General Atlantic paid a combined $350 million for convertible preference shares and warrants, which were both convertible into Lenovo shares at a price of HK$2.725 per share. Hence, the sale at HK$5.451 last night suggests the three firms made a handsome profit, even if they failed to capture the recent peak in the share price last Thursday after the earnings announcement. On that day, the stock gained 3.5% to a close of HK$5.62, although even with that gain the share price was still 9% below the 2010 high of HK$6.20 reached in late April. The share price fell to HK$5.58 in a weak market on Friday and lost another 1.6% to HK$5.53 yesterday.
Lenovo said last Wednesday that its net profit rose 44% in the second quarter to $76.6 million versus a year earlier on the back of strong growth in PC shipments, and added that it expects gross margins to improve gradually as component costs fall. Revenues rose 41% in the quarter to $5.76 billion.