Creative thinking: A dismal IPO market derailed many plans to raise equity capital over the past year, but one Hong Kong spin-off proved that companies could still meet their objectives in a bleak market. For its innovative solution, Swire Properties’ HK$5bn accelerated bookbuild is IFR’s Asia-Pacific Equity Issue of the Year.
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More than two years after Swire Pacific first tried to spin off its property division, the Hong Kong conglomerate finally completed the task through a listing by introduction and two accelerated trades from the group’s controlling shareholder.
While that unusual combination clearly met the group’s objectives, the first HK$5.02bn (US$645m) sale from John Swire & Sons stood out as a defining moment. In effect a re-IPO, it required banks to take a leap of faith, as it accounted for 130 days of trading and came at an extremely aggressive price.
Swire’s approach paid off, and the solid performance of the more liquid stock allowed JSS to complete its exit less than two months later, recycling capital for investment elsewhere within the group.
The block trade matched market conditions in a year when investors were reluctant to take the kind of market risk required to complete an IPO. It also allowed Swire to take advantage of growing risk appetite among arrangers, with underwritten block trades replacing jumbo Chinese listings as a major source of business.
Swire shelved plans for a US$2.7bn IPO of its property division in May 2010 when market conditions deteriorated. Instead of returning with a scaled-down deal – as many other issuers have done – Swire took a different route.
A year later, it sold Hong Kong shopping centre Festival Walk for US$2.43bn, bringing in much of the money it had intended to raise from the IPO.
Six months later, in January 2012, Swire listed on the Hong Kong bourse by introduction, without raising any funds. With no selling effort and distribution involved, listing by introduction allowed Swire to establish a separate funding platform in a difficult market.
However, like many other companies that listed by introduction, Swire Properties’ shares were thinly traded as only shareholders of parent Swire Pacific – including controlling shareholder JSS – were able to participate in the original listing.
The first selldown of the JSS stake, on August 13bn transformed the liquidity of the stock and introduced a host of global funds to the shareholder register.
The deal was marketed at an indicative price range of HK$21.46–$21.94 and priced at the bottom, for a discount of 10% to the pre-deal spot. JSS, however, had sold the 234m-share block to the three bookrunners – BOC International, HSBC and Morgan Stanley – at HK$21.53 each.
In other words, the banks re-offered the shares to investors at a 0.33% discount, absorbing the US$2.1m difference through their underwriting fees. The deal was comfortably distributed at the lower price, and Swire Properties’ shares fell just 4.19% to close at HK$22.85 the following day, holding well above the HK$21.46 placement price. The option to increase the size by another 54m shares was not exercised.
The book was well covered, with more than 90 investors participating. More than 50% of the demand came from Asia, 35% from the US and the rest from Europe. By investor type, long-only funds, including property-dedicated funds, accounted for more than half the book, while hedge funds made up 35%–40%.
Swire’s share price continued to rise, and JSS completed its disposal on October 3 after the bookrunners waived a 90-day lock-up period to remove the overhang on the stock.
In that transaction, JSS took in HK$4.88bn from the sale of 217m shares at the bottom of the indicated price range of HK$22.51–$23.23, or at a discount of 6% to the pre-deal spot.
The selldown was yet another blowout. The book was many times covered, with about 140 investors participating. More importantly, the block raised the public float to 17.99% from 14.28%, allowing Swire Properties to be added to the MSCI World Index – effective November 30 – handing it another liquidity boost.