Ctrip.com signalled its most significant rebuke to a withering price war that has crippled investor confidence. The Chinese travel portal last night finalised a US$160m five-year CB that featured a significant share repurchase and a derivatives transaction to offset dilution to premium share prices.
Equally bullish was the participation of Ctrip.com management, which agreed to purchase US$55m on the same terms as public investors. While management had been buying, with Ctrip co-founder and CEO Min Fan purchasing at US$25, the CB presented an opportunity to buy in size, said COO Jane Sun on a conference call to discuss the CB.
Ctrip shares, which traded as high as US$38.33 last November, are today at US$18.45, up 88 cents or 4.9%, following the overnight pricing of the CB. The CB, which priced at a 0.5% coupon and 10% conversion premium, the midpoint of talk, was quoted at 107 at that share price.
JP Morgan was sole bookrunner on the transaction.
To investors, the CB is a dividend-enhanced way of playing the equity.
CB advantage
For the company, however, the security offered multiple advantages. In addition to offsetting dilution, the concurrent share repurchase helped facilitate delta-hedging on the part of buyers of the CB. While the size of the buyback was not disclosed, management indicated that there was US$300m–$400m remaining under authorised programmes.
The CB, the dilution of which is accounted for on as-if converted basis, will be neutral to EPS dilution, after factoring in the reduction to outstanding from the repurchase.
The call-spread, whereby the embedded call option is repurchased and warrants are sold at a higher strike price, will increase earnings 5%. The warrants on the call-spread were struck at roughly US$26, a 50% premium and versus the 10% threshold on the CB.
Having issued in US dollars, Ctrip was able to buyback stock, while avoiding the need to transfer money from renminbi, which would have obligated a 5% dividend tax.
The participation of management arguably was the strongest endorsement. Ctrip management now collectively owned more than 10% of the company, up from 5% prior to the CB, COO Sun said on the conference call.
Such participation is rare in the context of a capital-markets transaction. The only similar situation in recent history saw Amkor Technology CEO James Kim invest US$150m of a US$240m CB the semiconductor testing company issued in 2009.
Since last November, Ctrip has been engaged in a price war with rival eLong. In a bid to win market share, the two companies are deeply discounting hotel rooms and airfares, threatening the financials of both. Analysts at Citigroup dubbed the engagement a “prisoner’s dilemma, as neither side was willing/able to give in, despite the costs.
