WH: the big piggy that went to market again

It could yet succeed a second time, helped by improved market sentiment, a slimmed-down syndicate team, tighter pricing and record quarterly earnings.

WH Group, the Chinese pork producer that yanked its high-profile $5 billion initial public offering in April, is coming back to market, this time with the aim of raising around $2 billion.

The company said in a July 10 filing with the Hong Kong Exchange that it is once again seeking approval from the city’s exchange to float its shares. The timing has not been finalised but once the Hong Kong Exchange grants approval, which takes two-to-three weeks, the bookbuild could start soon after.

There were no details in the filing on the fundraising size, how many shares it hopes to float or what the new indicative price range will be, but the pork producer appears to have taken syndicate advice.

The initial price range — which the issuer insisted remain at HK$8 to HK$11.25 per unit even after downsizing the deal in April — will now be lower, sources familiar with the deal told FinanceAsia.

In addition, all of the shares on offer will be primary, sources said. This is a stark contrast to the initial terms, which had an 80% primary and 20% secondary share split.

Crucially, WH Group also decided to shrink the syndicate team down from a record 29 banks to two global coordinators, bookrunners and sponsors — Morgan Stanley and BOC International. Several banks may take on junior roles once the bookbuild starts but Morgan Stanley and BOC International will be the sole banks handling the deal, according to the filing on the HKEx website.

Revising the terms of the deal gave WH Group an ideal opportunity to unveil record fiscal first-quarter earnings. Smithfield Foods, the US company taken over by WH Group last year in a landmark multi-billion-dollar deal, posted net income of $105.3 million in the first three months of the year, a 479% increase on the year-ago period.

Combining the Chinese and US segments, first-quarter net profits rose 225% year-over year to $407 million.

If at first...

At the first attempt this spring, WH Group sought to raise between $4.8 billion to $6 billion in its IPO, which would have ranked as one of Asia’s largest in four years.

Indications prior to the bookbuild were that long-only investors were very positive on the company’s underlying story but concerned about paunchy valuations. Generating interest was never a problem — the issuer and syndicate managed to garner $4 billion of demand from institutions and $2 billion from Chinese friends and family on the first day of the bookbuild.

The issue was that all of the demand came in at the bottom end of the HK$8 to HK$11.25 per share range. This contrasted with the views of the company’s existing shareholders — which included Shanghai-based CDH Group, Goldman Sachs, Temasek and New Horizons — who felt the company deserved a higher valuation because they wanted sell their stakes. This created an overhang that investors could not shake.

It led WH Group to restructure the IPO by slimming down the deal to $1.34 billion to $1.88 billion,  halving the primary share offering to 1.3 billion shares from 3.65 billion, and removing the secondary tranche. However, it kept the share price range unchanged, which meant the shares were valued at between 13.9 and 19.3 times expected 2014 earnings — a mistake and the main reason the deal failed.

Too many cooks

The record number of bookrunners on the deal was an additional hindrance. Fund managers complained about getting multiple calls from different banks with different information on the same company.

Organisation among the banks themselves was difficult — one ECM banker described a room crammed full of 50-some odd bankers all shouting different advice to company executives the week the deal was pulled.

The lack of synergy at the company also concerned investors, an issue the company has not addressed despite its strong first-quarter earnings.

WH Group purchased US pork producer Smithfield’s last year for $7.1 billion, and planned to use the proceeds from the IPO to reduce its debt gearing ratio, which stood at 286% at the end of 2013. But the US and Chinese business units remained separate, with proper synergies not expected for years.

Some investors felt WH Group should have spent more time unifying the two companies instead of hurrying to capital markets to pay down its massive debt.

One fund manager summed it up at the time the IPO was pulled: “They [WH Group] rushed into the IPO and didn’t spend time to actually create the synergy between the US and Chinese businesses. They wanted to float the stock to fund the acquisition and also let the private equity firms exit. If WH Group is that good, then ride with me. Why should I buy when you’re selling?”

But a few months can make a difference, at least in terms of general market sentiment. In the first five months of the year, 16 deals raised $7.8 billion, with a significant chunk coming from HK Electric’s $3.1 billion IPO. In June alone, however, 19 deals were completed worth $3.6 billion, according to a US bank data.  The Hang Seng China Enterprises Index ETF also rose 4% in June.

So now, with a slimmed-down team coordinating the sale and a lower price range, one of this year's darling IPOs could yet see light after all.

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