San Miguel Corp, the Philippine conglomerate whose businesses range from beer and food to oil, power and infrastructure, is set to raise $880 million from a concurrent sale of shares and exchangeable bonds. The fundraising is slightly larger than the $850 million indicated by the company earlier this month and could increase to $970 million if the $20 million greenshoe on the international tranche of the equity portion, and the upsize option on the domestic tranche, are both exercised in full.
Even at the base size, this is the largest follow-on capital raising in the Philippines ever. It is also the first ever combined equity and equity-linked deal in this market.
However, in return for the larger size, the company and its controlling shareholder, Top Frontier, had to compromise on price, as most of the investors who came into the equity portion of the deal were highly price sensitive. Having initially set a price range of Ps140 to Ps160 before the international bookbuilding kicked off on April 14, the indicative price was lowered to Ps110 to Ps140 two days before the close and eventually fixed at Ps110. This translated into a 28.1% discount to the latest market price of Ps153.
The final deal also falls well short of vice-chairman Ramon Ang’s talk of a sale of 1 billion shares back in December. Based on the share price at the time, that suggested a deal size of about $3 billion.
The exchangeable bonds did price at the issuer-friendly end with a 2% coupon and yield and a 25% exchange premium, but because it used the same Ps110 as the reference price, it was viewed as generous relative to other recent equity-linked deals. Indeed, investors were much keener on the bonds, which attracted a final order book of $2.8 billion. By comparison, the demand for the equity portion reached only $500 million, which clearly shows that the deal would have failed had it not been for the concurrent EB. Or seen the other way, the bookrunners were able to turn a difficult situation into a successful capital-raising by using the EB to draw in investors.
The deal was marketed as a way to invest into the broader Philippine economy, but evidently investors were not that comfortable with San Miguel’s aggressive expansion into new industries such as power, mining, energy, infrastructure telecommunications and banking, during the past few years. For one, it makes the stock more difficult to value, and there may also be concerns that it is spreading itself too thin.
In the end, the size of the EB was finalised at $600 million, which makes it the largest equity-linked deal out of the Philippines ever and also the largest exchangeable or convertible issued in Asia this year. The equity portion was split into a $200 million international tranche and an $80 million domestic tranche. The latter opened for subscription yesterday and will remain open until noon on Friday. However, the banks involved built a shadow book during the international bookbuilding and, according to sources, there will be no problem filling that tranche.
Some 75% of the equity portion consisted of existing shares that were sold by Top Frontier, which owned 67.2% of San Miguel before the transaction and controlled 88.4% of the votes. San Miguel also owns a 49% stake in Top Frontier, making this a classic cross-shareholding situation. The EB was sold by San Miguel itself.
Aside from raising funds that can be invested into the company’s emerging infrastructure business, a key purpose of the deal was to increase the free-float and put the San Miguel stock back on the radar screens of international institutions. According to the Philippine Stock Exchange, the free-float was only 8% before the offering, which meant the deal had to be marketed pretty much as an initial public offering with an extensive roadshow, pre-deal research and a discount to other Philippine conglomerates. Investors also looked at the equity on an absolute valuation basis, rather than as a discount versus the current market price.
To get the maximum effect on the free-float, San Miguel initially planned to sell only shares. However, this turned out to be too much of a challenge, and so the plan was revised to include the exchangeable bonds at attractive terms as well. To ensure the company would still achieve its free-float objective, the EB was designed to be equity-like and to maximise the possibility of conversion. Hence the favourable premium.
The bonds also have a short three-year maturity, an issuer call after 1.5 years, and a quarterly reset after the first six months down to a floor of 80% of the initial conversion price. Investors clearly liked the terms, as indicated by the large order book. And last Thursday, the day after the pricing, the EB was trading at 103-105 as investors who failed to get allocated chased the bonds in the secondary market.
Contrary to some other concurrent offerings, investors were not required to buy both the EB and the equity, but, as mentioned, it was definitely encouraged. One source noted that more than 95% of the bonds did go to investors who also bought the equity and of the 150 investors who submitted orders for the EB, less than 35 actually got allocated. Most of the buyers were said to have been hedge funds, although sources said there were also some outright buyers of the equity.
The free-float will increase to 12.7% immediately after this deal and to about 20.2% if the EB is converted into equity in full.
Sources said the demand for the equity spiked at a price of about Ps120 per share, but to stimulate the book, the company and its bankers decided to drop the price to Ps110. The fact that investor interest tapered off after Standard & Poor’s downgraded its ratings outlook on the US to negative one day before the books closed likely played a key role for that decision.
The final price translates into a 40% discount to net asset value and a price-to-earnings multiple of 11.4, based on the joint bookrunners’ consensus.
The CB was marketed with a coupon and yield of 2% to 2.5% and a conversion premium ranging from 20% to 25%.
Based on a credit spread of 400bp, a full dividend adjustment and an assumed stock borrow cost of 5%, the bond floor worked out at about 90.5% and the implied volatility at about 15%. The latter compared to a realised historic volatility of more than 25%, and again underlined the attractiveness of the EB. However, the illiquid nature of the stock until now does make the historic number a bit arbitrary.
As reported earlier, San Miguel chose to halt trading in its stock on April 13 and to keep it suspended for the duration of the sale to deter speculative trading and to allow investors to “carefully analyse and consider investing in the offer shares”. The decision was taken after the share price tumbled 7.5% on April 11 and another 4.4% on April 12 after the company revealed its plan to split the fundraising between shares and equity-linked bonds. The shares will remain suspended until May 5.
Credit Suisse and Standard Chartered were joint global coordinators and joint bookrunners both for the international portion of the equity offering and for the EB. Goldman Sachs and UBS joined them as bookrunners. Meanwhile, ATR-Kim Eng, BDO Capital and SB Capital are joint bookrunners for the domestic equity offering.
