WH Group IPO is now more of a piglet

The Chinese pork producer has lowered the valuation for its planned Hong Kong listing to a fixed price of HK$6.20 per unit from HK$8 to HK$11.25.

WH Group has lowered the valuation for its planned Hong Kong IPO after pulling the initial high-profile $5 billion deal in April.

The Chinese pork producer is now seeking to raise up to $2.05 billion by selling 2.56 billion shares at a fixed price of HK$6.20 per unit, people familiar with the situation said on Tuesday.

This represents 18% of the enlarged share capital. A greenshoe option – if exercised – could boost the amount to $2.36 billion.

The fixed price puts the company’s forward p/e at 11.5 times 2014 earnings, much more attractive than the 15 to 20.8 times 2014 earnings marketed in the first attempt.

WH Group’s lower valuation appears to be resonating well with investors, with the pork producer securing 30 anchor investors before the bookbuild formerly kicks off on Wednesday, sources tell FinanceAsia.

A number of sovereign wealth funds, long-only institutional investors and hedge funds have all agreed to purchase shares at the fixed price once books close on July 29.

Furthermore, the syndicate team has been sliced from a record 29 to just two — Morgan Stanley and BOC International — which has also undoubtedly helped.

“Here was a company that tried to do an IPO badly. They were way too aggressive on the valuation and  bookrunners played off each other,” a source familiar with the deal told FinanceAsia.

“Now they’re doing something which could not be more different. It’s a disciplined IPO with a couple of bookrunners at a good price discovered from the pre-marketing. This is old school, back to basics. It’s showing people are re-awakening to Hong Kong’s IPO market, as long as [the IPOs are] done properly.”

The geographic split for the institutional tranche is one-third Asia, one-third Europe and one-third US.

Books for the retail tranche open on Thursday, although sources close to the deal do not expect much take-up from the Hong Kong retail community, who typically tend to avoid deals that failed to come to market at the first attempt, even if the valuations are made more attractive.

In addition to downsizing the deal to HK$6.20 from the initial HK$8 to HK$11.25 range, the secondary tranche has been eliminated, a contrast to the initial terms, which had an 80% primary and 20% secondary share split.

WH restructured the deal in April, unsurprising given the tensions between investors and shareholders, but kept the price range the same, a crucial mistake.

While potential investors felt the initial valuation was too punchy, existing shareholders — which include private equity firms CDH, Goldman Sachs, Temasek and New Horizons — wanted to maximise the value of their holdings and felt the pork producer should be priced closer to analysts’ fair value estimates. This created an overhang that was difficult for investors to ignore.

However, in this latest attempt to go public, the issuer and syndicate appear to have done everything possible to eliminate the overhang by implementing lockups for   the majority shareholders.

The company’s existing management, which own 42.6% of the company, are subject to a three-year lockup, while CDH, which owns 38.1% and is the second largest shareholder, is locked up for one year, sources said.

Other shareholders, including Goldman, Temasek and New Horizons, are only subject to a six-month lockup but sources close to the deal said this should not create a significant overhang, simply due to the size of these investors’ stakes — of the three mentioned, Goldman holds the most with a 4% stake.

And, while some of the shareholders are not subject to any lockup, they hold less than 2% of the company - such a small percentage that it’s unlikely to contribute to an overhang, sources said.

Comparables

The revised deal puts WH Group’s 2014 and 2015 valuation — 11.5 and 10.4 times — at a discount to its own listed subsidiaries.

Shenzhen-listed Henan Shuanghui Investment and Development is currently trading at 15.14 times its forward 2014 earnings. Its European packaged meat business, held by Spain-listed Campofrio Food Group, is trading at 20.12 times its 2014 p/e.

Smithfield Foods, the US company taken over by WH Group last year in a landmark multi-billion-dollar deal, was trading at about 13.2 times its 2014 earnings at the time of its delisting last autumn.

Other comparables include Chinese snack food groups Tingyi Holdings and Want Want China Holdings, trading at 30 times and 24 times forward earnings, respectively.

If at first ...

The new deal is a shadow of its former self, and will have repercussions for the company. WH will not raise the money needed to pay down debt it took on when it acquired Smithfield last year for $7.1 billion, which brought its debt gearing ratio to 286%.

Still, there are a number of factors working in WH’s favour. Market conditions in general have improved. Excluding HK Electric’s $3.1 billion blockbuster deal in January, only $4.5 billion of deals were completed during the first five months of 2014.

Last month represented an about-turn for Hong Kong’s IPO markets, with 24 deals raising $3.9 billion in June alone. And so far up to July 22, ten deals have raised $1.5 billion, according to Dealogic.

WH also reported record first-quarter earnings, which almost certainly grasped investors’ attention. Smithfield Foods posted net income of $105.3 million in the first three months of the year, a 479% increase on the year-ago period. And combining the Chinese and US segments rose 225% year-on-year to $407 million.

Importantly, sources anticipate the smaller deal size will result in better aftermarket performance for the pork producer.

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