The Carlyle Group on Friday sold another HK$13.9 billion ($1.79 billion) worth of H-shares in China Pacific Insurance (Group) Co (CPIC), making the most of the fact that the share price had been on the rise since it raised $864 million on December 29. While another deal had been widely rumoured, the timing still took the market by surprise, coming as it did on a Friday before the monthly US non-farm payroll data release, which remains one of the most important gauges for the US economy.
Still, given the size of the transaction, banks were keen to get a piece of the action and didn’t hesitate to bid aggressively for the trade when Carlyle approached them after the close of Hong Kong trading. The business went to Goldman Sachs and the fact that it subsequently offered the shares to investors at a 0% to 0.5% discount versus Friday’s close suggests that the bidding process was very competitive.
However, investors were also keen to be part of the action and, while the offering price looked very aggressive at launch, the deal actually cleared at a price that was equal to the latest market price. A source noted that the removal of the overhang of Carlyle’s expected sale gave investors the confidence to buy, especially since the US private equity firm will now be locked up for another six months. The two trades together have also seen Carlyle’s holdings in CPIC drop from 57.2% of the H-share capital to just 29.9%, which will have a corresponding impact on the freefloat and result in a noticeable increase of the company’s weightings in some indexes. And that, in turn, will lead to some passive buying from index-tracking funds, suggesting the share price will remain well supported in the near term.
CPIC is also not that actively traded – the average turnover is only about $60 million per day – which means this deal accounted for some 30 days’ worth of trading and provided great access for investors who wanted to increase their exposure to the stock, or indeed buy into it for the first time.
On a more fundamental basis, insurance companies usually benefit from rising interest rates, making the company an interesting play in the current environment.
But the main reason why Goldman felt confident about going out with such an aggressive price was probably the fact that a couple of long funds came in as anchor investors and bought a significant portion of the deal. One of them was new to the company, while sources identified the other as German insurance company Allianz Group, which also participated as one of six cornerstone investors in CPIC’s Hong Kong IPO in December 2009. Allianz bought invested $150 million in the IPO, which gave it about 38.6 million shares and about 1.7% of the H-share capital.
On Friday, Allianz was believed to have bought close to half the deal, which means its total investment in the Chinese insurer will increase to above 5% of the H-share capital – the cut-off level for when investors need to disclose their share purchases. Further details of its investment will therefore become available in the next few days.
The second large buyer is also expected to have bought enough shares to exceed 5%, which would require an investment of about $500 million.
Overall, the deal attracted close to 50 investors and was comfortably covered, the source said. The vast majority were said to have been long-only funds, which isn’t surprising given that the placement price offered no discount versus the latest market price. The source said most of the buyers were from Asia and Europe, but with some participants from the US. The deal was kept open until 9pm Hong Kong time to give US investors a chance to participate.
Carlyle sold 415.2 million shares, which corresponded to 17.9% of the H-share capital, or 4.8% of the company’s share capital when also including its Shanghai-listed A-shares. The shares were offered to investors at a price between HK$33.28 and HK$33.45, and the final price was fixed at the top of that range for a 0% discount to Friday’s close.
The placement corresponded to about 37.5% of Carlyle’s remaining shareholding in CPIC and will reduce its stake in the company to 8.1% from 12.9%. Before the December deal, it held 15.4% which it accumulated through two separate investments in 2005 and 2007.
The December deal, which was handled by UBS, was described as a privately placed transaction and sources have suggested that it may have been arranged even before Carlyle’s 12-month lockup from the IPO expired on December 23. Certainly, the fact that Carlyle didn’t have to commit to a lockup after the deal went through the market on December 30 indicates that it wasn’t viewed as a traditional capital markets transaction.
The December deal comprised 215.8 million H-shares, or a 2.5% stake in the company. They were sold at a fixed price of HK$31.15, which represented a modest 0.6% discount to the December 29 closing price of HK$31.35. The stock was under some pressure leading up to the lockup expiry, falling 15.9% from HK$34.60 on November 10 to HK$29.10 on December 15, but after that it started to head higher again. Market participants noted that the relatively thin trading volume makes it quite difficult to cover short positions in the stock and some investors also started to doubt whether Carlyle would actually sell immediately after the lockup expired.
However, the recovery provided Carlyle with a perfect opportunity to secure some profits.
China Liansu
And Carlyle wasn’t the only seller to take advantage of the gains in the Hong Kong market last week. On Thursday, a company owned by the chairman sold a 5% stake in China Liansu Group Holdings, raising HK$942 million ($121 million). China Liansu, which is the largest Chinese producer of plastic pipes for water supply and drainage, listed in Hong Kong in June this year at a time when several other IPOs were cancelled due to a volatile market environment and lacklustre investor interest. Liansu scraped through by offering its shares at a 2010 price-to-earnings multiple of just six times – well below the industry average of 10 to 12 times.
In the past couple of months, the share price has had a good run, however, as investors have started to take an interest in the company and analysts have initiated coverage on the stock with attractive target prices. Before the Thursday transaction, the share price closed at HK$6.84, which is up 163% from the IPO price of HK$2.60.
Chairman Wong Luen Hei, who had been subject to a six-month lockup after the IPO, offered 120 million shares with an option to upsize by a further 30 million shares, and with the deal covered in just 30 minutes, that option was used in full. Investors were somewhat price sensitive, however, and the price was fixed at HK$6.28, which was below the mid-point of the offering range of HK$6.16 to HK$6.43 and equalled an 8.2% discount versus the Thursday close.
The buyers came mainly from Asia with some participation from Europe and the US. They included fundamental accounts that came in for relatively big amounts and both existing shareholders wanting to top up their holdings and those who “missed” the IPO.
J.P. Morgan and UBS were joint bookrunners for both the placement last week and the IPO in June.
