Cosco Pacific raises $601 million to fund acquisition

Cosco Pacific, the Hong Kong-listed operator of container ports, last night raised HK$4.67 billion ($601 million) from a top-up placement that was upsized by close to 16% due to good demand. The deal was launched minutes after the company announced that it has agreed to an acquisition that will increase its effective stake in China's Yantian port at a total cost of $520 million.

The acquisition will see Cosco Pacific buy the entire 13.7% stake in a company named Sigma Enterprises held by Danish conglomerate A.P. Moeller-Maersk, increasing its own holdings in Sigma to 20.55% from 6.85%. Sigma owns 73% in the joint venture that operates and manages Yantian Terminal (Phase I and Phase II), 65% in the JV that operates and manages Yantian Terminal (Phase III) and 65% in the JV operating Yantian's West Port.

In the announcement, Cosco Pacific said that the acquisition is in line with its strategy of improving the quality and profitability of its terminal business, as well as its market share in the South China terminal market, and is expected to "materially enhance the group's overall profitability from the port division from 2010 and onwards".

"As Southern China is one of the most dynamic regions in the global economy, and the port sector directly benefits from the recovery of the global economy from the financial crisis as well as [China's] continuous economic growth, the company believes that the business of the Yantian Terminals will continue to grow in the coming years," it added.

The Yantian container terminals are part of the Shenzhen port in southern China, just across the border from Hong Kong and in near proximity to the thousands of factories in the Guangdong province that manufactures goods for exports to overseas markets. According to Ministry of Transport statistics, the Shenzhen Port handled approximately 18.3 million twenty-foot equivalent units (TEUs) of containers in 2009, making it the second busiest port in China and the fourth largest container port in the world. The Yantian terminals contributed 47% to the throughput at the overall port. In the first quarter this year, the throughput at Yantian increased by 18.4% from the same period last year.

Cosco Pacific said the acquisition will be financed through internal resources -- the company had just over $700 million of cash and bank balances at the end of March -- but added that it will also look to opportunistically strengthen its capital base through capital market transactions "when it is appropriate".

The placement

Clearly it deemed conditions to be appropriate right away since a new share sale covering the entire acquisition was launched almost simultaneously by joint bookrunners Goldman Sachs and J.P. Morgan.

The initial deal comprised 387.5 million shares, which were offered at a price between HK$10.40 and HK$10.96, representing a discount of 5% to 9.9% versus yesterday's closing price of HK$11.54. In return for the upsize to 449 million shares the price was fixed at the bottom of the range for the maximum 9.9% discount.

Still, at 19.8% of the existing share capital and more than 40 days' worth of trading volume, this was a chunky deal. And in light of the increasing volatility in global equity markets amid concerns about the debt situation in Greece, Portugal, Spain and Italy and the implication of the SEC's charges against Goldman Sachs, the discount doesn't look too cheap. That said, Cosco Pacific's share price has fallen 9% in the past three weeks, which would have helped convince investors that the offering price represented good value.

According to a source, the deal attracted both long-only investors and event-driven hedge funds that wished to take a bet on the acquisition being able to trigger a renewed rise in the share price. Overall, more than 100 investors participated in the transaction, which was anchored on a few core orders that helped build momentum. Excluding the anchor orders and the portion of the deal that they took up, the remaining offering was about three times subscribed without much order inflation when it closed after about four hours, the source said.

Asia-based accounts took the majority of the deal, but the order book also included blue-chip accounts from both Europe and the US.

Analysts are generally quite positive on the stock, with 15 "buys", nine "holds" and no "sells" on it, according to Bloomberg. However, the acquisition also comes at a good time as there is good momentum in the shipping industry now with most observers believing that the bottom of the cycle has passed.

At times of high stock market volatility, like what we are experiencing now, investors also tend to prefer to invest in stocks where an event of one sort or another can act as a catalyst for the share price and lead to higher returns, bankers say.