It took joint bookrunners Deutsche Bank and Morgan Stanley months to prepare for the US$10bn sell-down, split between a US$3.4bn block trade and a US$6.6bn mandatory exchangeable, Asia’s largest convertible issue and the second-biggest equity-linked deal in the US.
Instead of pressuring the market with a giant block trade, the mandatory exchangeable trust securities allowed SoftBank to sell some of its shares at a premium and defer tax obligations, while the format appealed to investors looking for both yield and growth.
Before the transaction, SoftBank was sitting on an Alibaba stake worth more than US$60bn, equivalent to 90% of SoftBank’s own market capitalisation. SoftBank’s initial investment was so profitable that virtually the entire proceeds of the sale would count as a capital gain – taxed at 30% in Japan.
To ease that burden, most of the deal was structured as mandatory exchangeable trust securities. The bonds convert into Alibaba stock in three years, like a typical mandatory. But unlike a typical mandatory, the underlying shares are held in trust and delivery can be settled in cash or stock, thereby allowing SoftBank to defer tax obligations while retaining economic control.
From an investor’s point of view, the deal offered something that Alibaba’s shares do not – a dividend.
The METS offering, launched at a base deal size of US$5bn, was marketed at a coupon of 5.25%–5.75% and an exchange premium of 17.5%–22.5%, allowing investors to enjoy an attractive dividend and potentially benefit from an upside in the stock.
The deal was priced at a 5.75% coupon and 17.5% conversion premium, the investor-friendly ends of talk.
Specialist equity-linked accounts that did not own the underlying stock subscribed heavily to the new issuance, as did equity income funds that cannot own Alibaba since it has not paid a dividend since listing in 2014.
Shares in Alibaba closed at US$76.69 on June 1 when the METS issue was launched. By November 15, the stock was at US$91, or 18.7% above the reference price.
While the structure is commonly used in the US, it is relatively new to Asian investors and hence more investor education needed to be done in the region.
Eventually, about 55% of the deal went to US investors, 27% to Asian investors, 12% to Asia-based global funds and 6% to European buyers. By investor type, outright investors took 55% of the trade and hedge funds 45%.
Combined with the block trade, the exchangeable will reduce SoftBank’s stake in Alibaba from 32% to about 27%.
Goldman Sachs and Mizuho Securities were co-leads.