Waddel & Reed sell-downs

Waddell & Reed exits Citic Securities and CPIC

The US asset manager raises a combined $552 million from two transactions, which were completed on the same night that AIG was in the market selling AIA shares.
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Waddell & Reed raised HK$1.8 from the sale of its entire stake in Citic Securities
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<div style="text-align: left;"> Waddell & Reed raised HK$1.8 from the sale of its entire stake in Citic Securities </div>

US asset manager Waddell & Reed has exited two of its investments in Hong Kong-listed companies, raising a combined $552 million. The two transactions were done late on Thursday, the same day as AIG sold $2 billion worth of shares in AIA, making it one of the busiest sessions for Hong Kong block trades in a long time.

Waddell & Reed raised HK$1.76 billion ($227 million) from the sale of its entire stake in Citic Securities and another HK$2.52 billion ($325 million) by offloading its remaining shares in China Pacific Insurance (Group) Co, or CPIC. Both deals were arranged by UBS, which has a strong relationship with Waddell & Reed. Among other things, the Swiss investment bank earlier this summer helped the US firm trim its stakes in Hong Kong-listed Macau casino operators Sands China and Wynn Macau through two concurrent block trades. It also brought in the US firm as a pre-IPO investor in Formula One through two separate transactions.

The Citic Securities block was the first to launch, but still didn’t hit the market until about 9pm as the seller wanted to ensure the news from the European Central Bank meeting that evening was as good as the market expected before going ahead. It was. In fact, the market response to the ECB’s plan for open-ended purchases of short-maturity government bonds was surprisingly positive considering that the gist of the plan had already leaked in the days leading up to the meeting. The benchmark Stoxx Europe 600 index jumped 2.3% and sparked a renewed appetite for equity among investors.

UBS had taken no chances, however, and the offering was basically covered at launch. One investor in particular was said to have taken a large portion of the deal. Hence the bookrunner wasn’t really taking that big a risk launching the deal this late in the evening. And with the AIA block in the market at the same time, most large investors focusing either on Asia or the financial sector at large were already at their desks. Compared to AIA, Citic Securities isn’t really a must-own stock, but as the biggest brokerage in China, it is an interesting play on the domestic China market.

And demand turned out to be quite strong, with the deal ending more than two times covered even though it was open for only one hour. The bookrunner was also able to push the price to just below the mid-point.

Waddell & Reed offered 146.3 million shares at a price between HK$11.96 and HK$12.15, which translated into a discount of 6.5% to 8% versus Thursday’s closing price of HK$13. The final price was set at HK$12.05, resulting in a 7.3% discount.

The shares accounted for 12.5% of Citic Securities’ H-share capital and about 25 days of trading volume, based on the daily average in the past month.

According to a source, the buyers included a mix of long-only investors and hedge funds, as well as some sovereign wealth fund money and the usual major Asian accounts. More than 70 investors participated in the transaction.

Seeing the strong demand for Citic Securities, and in light of the fact that AIG had decided to sell only one-third of its AIA shares, leaving many investors with a lot fewer shares than they had hoped for, UBS went back to Waddell & Reed with a proposal that it also sell its remaining shares in Chinese insurance company CPIC. The asset manager agreed and after putting the paperwork in place, a term sheet went out to investors at around midnight.

Some orders came in straight away, but given the late hour the order book was kept open until 8.30am the next morning. And once Asian investors started coming in to work, the deal got covered very quickly. According to the source, CPIC is a name that investors know well, so it was easy for them to decide whether to participate or not at short notice. By comparison, the Citic Securities transaction relied more on the work done before launch and an attractive discount at the bottom of the range to create early momentum.

The CPIC deal comprised approximately 112.7 million shares, or 4.9% of the company’s H-share capital. The shares were offered at a price between HK$22.18 and HK$22.87, which equalled a discount of 1% to 4% versus Thursday’s close of HK$23.10.

The final price was fixed at HK$22.40 for a 3% discount, which was on the tight side for a deal that accounted for 10 to 11 days of trading volume. However, it was largely in line with the 5.2% discount at which Carlyle sold just over half its remaining stake in CPIC in late July, given that its deal was almost twice the size at $723 million.

And it was clearly not too tight as the CPIC H-share fell only 0.4% on Friday to a close of HK$23 — well above the placement price. Citic Securities performed even better and actually traded up on Friday. The stock gained 3.5% to a close of HK$13.46. However, it remains well below its all-time high of HK$17.20 that it hit in early March this year.

Several of the buyers of the CPIC block were the same as those that bought Citic Securities (sovereign wealth funds, long-only funds, hedge funds), and because it remained open until the morning, this deal also attracted some investors who had missed the earlier transaction on account of it not being launched until 9pm. CPIC supposedly also attracted more funds focused on the financial sector than Citic Securities did.

More than 60 accounts took part in the CPIC block and it was said to have been multiple times covered.

Interestingly, while this was a good time to sell in terms of the demand, Waddell & Reed did actually make a loss on both transactions as it sold the shares at a lower price than where it bought them. It has held the shares in Citic Securities since the company’s H-share IPO in September 2011, where it participated as a cornerstone investor, buying $300 million worth of shares at the IPO price of HK$13.30. It has reduced its holdings slightly since then in the open market, from about 175.88 million shares to 146.3 million, but on the shares it sold last week it would have made a loss of HK$1.25 per share.

With regard to CPIC, it bought part of its shares through a privately negotiated deal that was completed in late December 2010 just after the 12-month lock-up from the company’s H-share IPO expired. UBS was the sole arranger of that deal too. According to a disclosure filing on the Hong Kong stock exchange website Waddell & Reed bought 147.5 million shares through that deal at an average price of HK$29.25, bringing its total holdings at the time to 192.1 million shares. It is unclear when, and at what price, it has sold the rest of those shares.

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