Yurun placement is re-offered at 12.5% discount

The deal size is reduced to $202 million as initial terms prove too tight for investors.
Chinese pork meat producer China Yurun Food Group and its chairman yesterday raised HK$1.58 billion ($202 million) from a joint share placement, which offered clear proof that investors have taken note of the 4.3% correction in the secondary market over the past couple of days.

The deal, which was led by Goldman Sachs and UBS, failed to drum up enough support even though it was in the market virtually through the entire Hong Kong trading day. It wasnÆt until it was re-offered at a lower price in the early evening that the leads could finally close it. While it is unusual that a placement is re-offered at all, the large price reduction, which saw the discount widen to 12.5% from an initial 7.1% at the top of the range, made the deal the definite talking point in the market last night.

It was especially noteworthy that two such experienced banks as Goldman and UBS were to have misjudged the market to that extent. However, the transaction also highlights how quickly market sentiment can change and suggests that the August correction is still fresh in everyoneÆs mind even though the Hang Seng Index has rallied 40% since then.

One market participant noted that, had this placement been done two days earlier, it would probably have been a runaway success at the initial terms û after all, people like the company and its exposure to China's rising income levels and the consumption theme - but, in light of the downturn in the secondary market on Wednesday, those same terms now looked too aggressive. Another said the terms would have been fine had there just been a little bit of a tailwind from the market.

Instead the market remained highly volatile. Within the first 30 minutes of trading on Thursday the Hang Seng Index fell more than 600 points to below 26,850, then went right up to 27,423 points, before falling to about 27,000 points again. It extended the losses in the afternoon and finished down 506 points at 26,973.

In isolation, investors may have been able to absorb that without too much fuss, but coming on the heels of a 1,391-point drop from the intraday highs on Wednesday, it clearly didnÆt inspire investors to add to their exposure.

It likely also didnÆt help that half the deal was a sell-down by the controlling shareholder, as such divestments tend to raise the question of whether the owners believe the stock is near the peak.

The deal comprised 150 million shares, or 9.8% of the existing share capital, of which 50% was a top-up placement involving new shares. The rest was a straight sell-down by Chairman Zhu Yicai through a company called Willie Holdings that is owned by himself and his wife. As a result of this sale, WillieÆs stake in the company will fall from 51.6% to 44.2%.

The shares were initially offered within a price range of HK$11.15 to HK$11.50, which translated into a discount of 4.2% to 7.1% versus WednesdayÆs closing price of HK$12. With the other three Hong Kong placements over the past week having been completed at discounts of 7.95%, 6% and 7%, respectively, that range did look quite tight. Adding to the challenge, YurunÆs share price has also rallied 77.5% pretty much in a straight line since August 17. The producer of chilled, frozen and processed pork was suspended from trading yesterday as the placement was being carried out.

And indeed, when the bookrunners returned to the market with a new offer û supposedly at the level where they felt comfortable they could build a solid book - it was at a price of HK$10.50 per share, or at a 12.5% discount.

At that price, the book came together in less than half an hour and sources said it ended up being about two times covered and attracted around 50 investors. The eventual demand came predominantly from Asia, but was said to have included a few anchor orders from Europe and some US accounts.

According to one source close to the transaction, this wasnÆt a hard underwritten deal, which means the two bookrunners hadnÆt guaranteed they would be able to sell the shares at a specific price. As a result, they may well have been able to do the deal at the revised terms without losing any of their fees. GoldmanÆs long-standing relationship with Yurun is likely to have been helpful in this respect. The investment bank was a pre-IPO investor in the company and still owned 3.6% of the company before the placement through GS Funds.

Yurun said it would receive approximately HK$770.8 million of net proceeds from the sale of new shares, which it will use to expand its capacity both within upstream slaughtering and downstream meat processing.
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