Trinity Limited, the luxury menswear retailer controlled by the brothers behind Hong Kong-listed supply-chain manager and sourcing agent Li & Fung, yesterday became the first Hong Kong-listed company to raise fresh capital from a follow-on this year. The company pocketed about HK$750 million ($96 million) before expenses, which is the same amount that it raised in its initial public offering just over two years ago.
This is the first time Trinity is raising money since the listing and analysts believe the deal suggests that the company is ready to adopt a similar strategy as that of Li & Fung, namely to grow through regular acquisitions. Indeed, just before Christmas the company announced it had agreed to buy Cerruti Holdings for a cash consideration that won’t exceed €52.58 million ($68 million). The seller is Toga Cayman, which is held by US-based investment fund MatlinPatterson Global Opportunities Partners.
Trinity currently holds an exclusive licence to wholesale, retail, import, distribute and market menswear products under the Cerruti 1881 brand in Greater China. It also has the right to manufacture menswear under the same brand. Luxembourg-based Cerruti Holdings owns the Cerruti business as well as various Cerruti trademarks, including the iconic Cerruti 1881 brand, and by acquiring the entire company, Trinity has removed any uncertainty related to the renewal of its licensing agreement, which is due in 2013, including the risk of a potential increase in royalty payments.
The acquisition will also allow Trinity to expand the product categories it offers to include Cerruti’s non-apparel lines such as leather goods, perfumes and watches, it said in the December announcement. The Cerruti business was loss-making in both 2008 and 2009, but Trinity has set a target to turn the business around in 2011.
However, the money raised from last night’s top-up placement will not be used to pay for the Cerruti acquisition, but according to the term sheet will go towards “general working capital to fund future business developments and acquisitions from time to time”. This suggests a similar approach to fundraising as Li & Fung, which typically raises money before it goes shopping so that the investors buying the new shares will benefit from the acquisition. Li & Fung, which is owned and run by Victor and William Fung, has been extremely successful in its acquisition strategy through the years so a similar approach by Trinity is likely to be well-received by the market.
Indeed, long-only investors were reasonably keen to participate in the deal. A source said it was covered in just over an hour even though the discount versus yesterday’s close was fairly aggressive at 3.8% to 5.7% -- especially when considering that the stock is not that liquid. The deal accounted for about 6.3% of the existing share capital, but a fairly steep 35 days of trading based on the turnover in the past month.
The offering, which was led by Bank of America Merrill Lynch and BOC International, was not put out for competitive bidding, but Li & Fung is known for trying to keep the discounts down when it sells new equity as it is keen for the company to be viewed as a high-quality entity. And it seems the Fungs are applying the same principle to Trinity. The company management is believed to have been reluctant to price at the bottom, but with European and US markets turning lower during the bookbuilding there was quite a bit of price sensitivity in the book and that is indeed where it ended up.
The 100 million shares were offered at a price between HK$7.50 and HK$7.65 and sold at HK$7.50 for a 5.7% discount. The offering attracted almost 50 investors and was just about two times covered when the books closed at about 9pm, with three-quarters of the demand coming from Asia and the rest from Europe, said the source. The buyers included existing shareholders as well as new long-only accounts and a couple of corporate investors. Hedge funds were not particularly keen, given the thin liquidity in the stock and the modest discount.
Aside from being backed by the Fungs, which held about 40.9% before this deal but will be diluted slightly as they are selling old shares for new to enable the top-up placement, Trinity has also attracted some other stellar investors. One of those is Singapore investment fund Temasek Holdings, which bought $15 million worth of shares in the IPO as a cornerstone investor.
And Trinity has not disappointed. Its share price has gained 380% since the November 2009 IPO to yesterday’s close of HK$7.95 and its current trading level is only 9.6% below its all-time high of HK$8.79 that it reached in early December. Having been viewed as a small-cap company at the time of listing, it now has a market capitalisation of about $1.6 billion.
In addition to Cerruti, Trinity manages five other international menswear brands, including Gieves & Hawkes and its self-owned Kent & Curwen brand, and it is viewed as a direct play on the increase in domestic retail spending in China and the country’s general economic growth story. The company operates approximately 350 retail stores in Greater China, including more than 250 in mainland China. It also has a number of joint ventures with Salvatore Ferragamo in South Korea, Malaysia, Singapore and Thailand.
However, the strong rise in the share price means the stock is not cheap, which may have kept some investors away. Based on consensus forecasts compiled by Bloomberg, the company is currently trading at a 2011 price-to-earnings multiple of close to 29 times. That compares with an average of 18.2 times for other branded retailers in China, including clothing chains Esprit and Ports International, shoe retailer Belle and down jacket designer Bosideng.