Indorama raises $123 million from downsized IPO

Indorama Ventures, a Thailand-based petrochemical company focusing on polyester, will become the first company to go public in Thailand since April 2008 after pricing its initial public offering at the bottom of the range.

The pricing came after the company on Friday (the final day of the bookbuilding) downsized the offering from 913.4 million shares to 400 million shares, and raised a total of Bt4.08 billion ($123 million), compared with earlier plans to raise as much as $347 million.

According to sources, the size reduction, which was announced mid-afternoon Hong Kong time, reflected the deteriorating sentiment for equities that led to several days of sell-offs globally. And, as global institutional investors focused on reducing risk, their appetite for additional exposure to an emerging market like Thailand waned somewhat.

However, investors who had already put in orders didn't flinch even with the additional headwinds and the announcement that the deal would be cut to less than half the initial size - this is a move that can sometimes spook investors and cause them to pull their orders. But according to one source, almost all the investors stayed in the book although some did reduce their orders in proportion to the smaller size.

At the same time as the bookrunners announced the downsizing, they also indicated that the deal would likely price at the bottom of the Bt10.20 to Bt12.60 range and that only 75 million shares, or 18.8% of the total deal, would be available to international investors. The latter was a reflection of the strong demand from domestic accounts, but after a solid inflow of international orders on the last day from high-quality US-based long-only accounts, the bookrunners adjusted the split between the two tranches so that one-third of the deal, or 130 million shares, went to international investors and two-thirds to domestic investors.

Based on the announced size of 75 million shares, the international portion was about five times covered with some investors claiming that they would buy additional shares in the secondary market to compensate for being scaled back in the primary allocation. However, sources said the allocations were skewed towards the top investors, which may limit that impact.

About half of the demand came from the US, while Asia accounted for one-third. European-based accounts made up the remaining 17%-20%. Although Indorama is really a global company that just happens to be based in Thailand, the buyers were primarily funds focused either on this region (Thai and Asean funds) or on emerging markets in general. The sector specialists were few and far between, however.

Part of the aim with the listing is to combine one of Indorama Ventures' already listed subsidiaries, Indorama Polymers, with the parent company to improve the integration between the two operations and make the group even more efficient in terms of reducing costs and enhancing margins. It will also provide better access to the stock for international investors, many of whom have previously been put off, or restricted, by the limited liquidity.

To achieve this, Indorama Ventures is conducting a simultaneous share swap, offering existing shareholders in Indorama Polymer to exchange their existing Polymer shares for shares in Indorama Ventures. Following the share swap, which will remain open until February 1, Indorama Polymer will be delisted.

With the IPO price being fixed at the bottom of the range, some shares will be moved from the IPO to the share swap as compensation for the lower price. While this won't have an impact on the IPO since it had been downsized already, leaving plenty of shares available for that reallocation, it means that the share swap, if used in full, will account for 601 million Indorama shares. Together with the IPO this will result in a total free-float of 23% at the time Indorama's listing -- 9.2% resulting from the IPO and 13.8% from the share swap.

The combined size of the IPO and the swap offerings will be $318 million, which suggests the company will have a market cap of about $1.38 billion at the time of listing. Indorama won't receive any money from the swap, however. The IPO could increase slightly to a maximum $141 million, if the company makes use of the 15% greenshoe option.

Indorama's largest business line, in terms of revenue, is polyethylene terephthalate, better known as PET, which is used primarily to make drink bottles. It is also the second largest producer of PET globally. But the company also has two other business lines -- polyester fibre, which is mainly used in textiles and for industrial purposes including conveyor belts and technical fabrics; and purified terephthalic acid (PTA), which is a feedstock that is used for the manufacturing of various other polyester products, including PET.

Part of Indorama's strategy has been to buy underperforming production assets at attractive prices and then turn them around. This is likely to continue and, according to sources, the management has been telling potential investors that they will be able to double the company's market value within the next three years. One syndicate research report projects that the company will be able to deliver an Ebitda compound annual growth rate of 48% between 2008 and 2011, by expanding it production capacity -- not through acquisitions but by increasing the utilisation rate at its existing facilities, including a greenfield PET plant that came on stream in the fourth quarter of last year.

The IPO price translates into a 2010 price-to-book multiple of about 1.2 times and a price-to-earnings multiple of 7.1 times for the same year. Both multiples put it at a sizeable discount versus its regional peers, although analysts note that there are no pure-play comps since most of the other global PET players also have other petrochemicals businesses. It is also listing at a slight premium to its Thai peers, which are trading at an average 2010 price-to-book of 1.1 times, according to syndicate research. Analysts argue that this is warranted given Indorama's greater international exposure and its greater return-on-equity.

Bank of America Merrill Lynch and Morgan Stanley are joint bookrunners for the international portion of the deal, while Bualuang Securities is responsible for the domestic portion. The shares are due to start trading on February 5.