Vodafone offloads $6.5 billion of China Mobile stock

The record deal is well received, but a tough timetable and a tight discount leave the three bookrunners holding a small portion of the shares.

UK mobile operator Vodafone yesterday raised HK$50.9 billion ($6.5 billion) from the sale of its entire 3.2% stake in Hong Kong-listed China Mobile, as part of a plan to divest minority holdings that it doesn’t view as essential for its business.

The massive deal is the largest overnight equity offering in Asia-Pacific ever, according to Dealogic data, ahead of a $3.5 billion placement of Rio Tinto shares in July 2009. It also dwarfs Bank of America Merrill Lynch’s $2.8 billion sell-down in China Construction Bank in January last year, which was previously the largest block trade in a Chinese company involving a foreign shareholder.

It was also the second block trade above $1 billion in a Hong Kong-listed company in a week, and like the other one – a $1.2 billion sell-down by Newbridge in Ping An Insurance (Group) – it came at a much tighter discount than what would be considered reasonable for such a large deal. This reflects the keen competition among banks for these large trades, which are important not only for the fees that they bring in, which frankly aren’t that big, but for the league table credits that they provide. And banks that have missed out on earlier deals are getting ever more aggressive in trying to win the next piece of business, sources say.

Given the size of the deal, Vodafone hired three banks for this transaction – Goldman Sachs, Morgan Stanley and UBS – although that was not known when interested banks were asked to submit their proposed transaction terms after the close of trading on Tuesday, and thus did little to ease the aggressive bidding.

Looking at the largest block trades in Hong Kong this year, Newbridge’s first sell-down in Ping An in early May ($1.25 billion) was completed at a 4.6% discount versus the latest close, while last week’s sale came at a mere 1.2% discount. And the China Mobile transaction, which was more than five times the size of each of those deals, fetched a modest 3.2% discount. Normally, one would expect a deal of this size to require a discount of well over 5%, perhaps as much as 8%-10%. By comparison, the $2.8 billion CCB block last January came at an 11.9% discount.

But investors keep buying, so who can blame the banks for pushing the boundaries in this respect? Now, a similarly aggressive trend in fees is a different matter, as it is leading to lower and lower margins for the banks.

However, the China Mobile transaction was also a talking point yesterday for an entirely different reason – the timing of the deal. For one, it came on a day when European stocks were falling and the US futures indicated a lower opening. And while Vodafone asked for bids from investment banks at around 5pm in the afternoon, the selection took several hours and the deal didn’t actually launch until midnight Hong Kong time, by which time most Asian investors were snugly tucked up in bed and European investors were starting to head out of the office. And in the US, trading had started, which meant China Mobile’s American depositary receipts were live and subject to selling in response to the transaction.

The reason for the delay isn’t entirely clear, although the result was that most of the deal had to be sold in just a couple of hours just before the Hong Kong market opened yesterday. According to a source, just over two-thirds of the deal was bought by Asia-based investors, while about 20% went to the US and 10% to Europe.

Still, even with the time pressure, the deal saw good demand from long-only funds, many of them longer-term investors who were attracted by China Mobile’s high dividend yield of about 4%. Investors who participated in the transaction are eligible to receive the interim dividend of HK$1.417 per share which will be paid by the end of September.

Sources note that China Mobile’s 8% weighting in the Hang Seng Index also makes it a good choice for investors who want to increase their exposure to Asia and China – and recent data show that the outflow from the US and inflow into Asia is continuing.

There was also some demand from private banks and hedge funds, although the latter were less keen on this deal than on last week’s Ping An transaction on the basis that China Mobile isn’t a growth stock. In all about 50 or so investors participated in the deal.

Vodafone offered all its 642.87 million shares at a price between HK$79.20 and HK$80, which represented a discount of 2.5% to 3.4% versus Tuesday’s closing price. Given the time constraints and the fact that the range was already tight, it was no great surprise that the final price was fixed at the low end, at HK$79.20, for the maximum discount. The deal also accounted for about 35 days’ worth of trading volume.

One reason why investors may have been willing to buy the shares at such a tight discount was the fact that the share price had come down in the previous three weeks amid speculation that Vodafone was about to sell. However, after falling 6% from a 2010 high of HK$84.30 to a close of HK$79.20 last Wednesday, the price recovered some of those losses and by the time the deal was launched the decline was no more than 2.7%.

Still, China Mobile had underperformed peers like China Telecom and China Unicom, as well as the Hang Seng Index, and there had also been quite a lot of short-selling in the stock, which created a natural demand among investors who needed to fill the shorts.

That said, the three banks were not able to place all the shares with external accounts, but between them were left with what was referred to as “a small residual position”, according to sources. The time constraints may have played a role as they had to close the order books at about 9.15am in order to have time to allocate the shares before the Hong Kong market opened. But one may also speculate that a wider discount would have attracted more investors to the deal.

Either way, the share price held up reasonably well yesterday in the wake of the transaction. It fell 3.1% to a close of HK$78.90, which was below the placement price, but the entire market was down as well and the Hang Seng Index lost 1.5%.

Vodafone was of course pleased with the transaction and, in an announcement, CEO Vittorio Colao noted that the sale had allowed it to almost double its original investment that it made in 2000. The UK company also noted that the commercial and technology cooperation between Vodafone and China Mobile will continue irrespective of the sale.

About 70% of the proceeds will be returned to shareholders through a share buyback, while the rest will be used to reduce its outstanding debt, Vodafone said.

¬ Haymarket Media Limited. All rights reserved.
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