VC investors divest Mengniu stake

Private equity investors take advantage of liquidity driven markets to offload a stake in Mengniu Dairy.

Three private equity shareholders of Hong Kong listed Mengniu Dairy completed a 168 million share secondary offering yesterday (December 16) raising $131 million under the lead management of Morgan Stanley. The three - MS Dairy (an offshoot of MS Capital Partners), CDH China and Actis China - offered 57 million existing secondary shares and 111 million shares that represented 30% of a convertible bond, which had become excerciseable on December 10.

The deal was marketed on a price range of HK$5.99 to HK$6.09 and priced at HK$6.06, which equated to a discount of 4.6% to the stock's HK$6.35 close. The offering represented a fairly weighty 60 days trading volume, 15% of the pro-forma share capital and 41.8% of the current freefloat.

Pre deal and pre convertible, the financial investors owned 11% of the company and 35% was in freefloat. Post conversion, the financial investors would own 34%, with the freefloat dropping to 25%.

Books are said to have closed three times covered, a healthy ratio considering that fund managers' enthusiam for new issues normally wanes considerably by mid-December. Bankers attribute this to a post election liqudity rally driven out of the US, which took slightly longer than expected to gain momentum, but became evident in early December.

About 50 accounts participated in the Mengniu deal of which roughly half already owned the stock. About 40% comprised hedge funds and 60% long only accounts.

At HK$6.35, Mengniu is trading at about 19 times 2004 earnings and 14 times 2005. It initially priced its IPO at HK$3.95 in mid-June on a similar P/E ratio of 19 times analysts then estimates.

The IPO was phenomenally successful attracting an oversubscription ratio of 203 times from retail investors and 15 times from institutional. It has since performed extremely well, buoyed by investors' enthusiasm for China consumption stories.

Analysts believe the latest divestment should be supportive of the share price since it removes an overhang. The company also recently announced that it was planning to invest in a 10,000 cow cattle ranch in Inner Mongolia with AustDairy. When it is fully up and running in three years, the ranch is expected to be China's largest and analysts say it will do much to boost quality control of Mengniu upstream operations.

The company currently has a 20% market share of the liquid milk market in China.