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Union Bank of the Philippines prices "re-IPO" at tight discount

The lender aims for a re-rating as the sale will increase liquidity and boost the free-float.
The Union Bank of the Philippines has become the latest in a string of companies û including banks û to sell new shares to international and domestic investors through a fully marketed follow-on transaction aimed at boosting the liquidity in the stock.

The bank also needed to strengthen its capital adequacy ratio to meet the Basel II requirements and consequently all the shares on offer were new. In the past, these sales, often referred to as re-IPOs because they tend to result in a significant broadening of the shareholder base, have typically included a sizeable sell-down by the controlling shareholders.

Having completed the international portion of the deal, which is the price setter for the entire sale, Union Bank looks set to raise Ps4.62 billion ($100 million) before the greenshoe. The latter may boost the total deal size by 15% to about $115 million.

The final price was fixed early Thursday at Ps59, which represented a 3.09% discount to the 30-day volume-weighted average price of Ps60.88. Macquarie Securities as the sole international bookrunner had previously told investors the intention was to price within a 0% to 9% discount to the 30-day VWAP.

The final 3% discount is at the tight end of the discounts previously achieved for similar re-IPOs in the Philippines, which range from 3% to 10%, according to a banker. However, with the share price up 3.2% to a close of Ps64 the day before the pricing (Wednesday, April 25), Union BankÆs discount would have widened to 8.5% had this been used as the reference price.

The total public offering comprised 73.8 million shares, of which 80% or 59.04 million shares went to international investors. The remaining 14.76 million shares will be sold to domestic institutions and retail investors through a separate offering that will run from today and will be arranged by ATR KimEng Capital Partners.

In addition, Union Bank is also selling 4.5 million shares through a rights offering to existing shareholders (based on the April 13 record date), which will count towards the total proceeds. All in all, the bank will sell 78.3 million shares, or 90 million if the greenshoe is exercised in full.

The $74 million institutional portion was about three times covered at the final price and attracted just over 20 investors. Around 90% of the deal was allocated to long-term funds. In terms of geographic distribution about 55% ended up with Asian accounts, while the remaining 45% went to the US and Europe combined.

According to Stephen CuUnjieng, managing director at Macquarie, Union Bank is considered one of the best banks in the Philippines with strong fundamentals, including one of the lowest cost-to-income ratios, low levels of non-performing loans, good deposit and lending growth and strong returns on assets and equity. Before Union Bank took over International Exchange Bank in August last year it also had one of the strongest CAR ratios at about 30%, although this has dropped to 17% as a result of the merger and will fall further to 13% based on the new Basel II requirements. Thus the need to shore up the capital base.

But even though earnings have been growing at about 20% per year, Union BankÆs share price has failed to perform as the illiquid trading in the stock has prevented many international investors from buying it in any meaningful size.

ôThis deal will reintroduce liquidity so that the stock can legitimately re-rate,ö CuUnjieng says.

Based on 551.4 million listed shares, the share sale, including the rights issue and the greenshoe, will account for about 16.3% of the company. According to data on the Philippine Stock Exchange website, the transaction makes up 72% of the current public float.

The final price values Union Bank at 1.8 times its current book value, or about 2 times if you remove the goodwill. This pitched it at par with Equitable-PCI and China Bankin Corp., which trades at 2 times and 1.8 times, respectively, but at slight discounts to Banco de Oro Universal at 2.3 times and Bank of the Philippines Islands at 2.9 times.

While Union Bank isnÆt as large as the latter two, its 20% earnings growth should allow it to at least tighten the gap to its bigger rivals and according to one observer the current price ôleaves a lot of roomö for more share price upside.

How this actually pans out wonÆt be clear for a while as the stock was halted from trading yesterday and will remain suspended until May 10 as the domestic portion of the trade and the rights issue are being competed.
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