Late orders get HKT Trust's $1.2 billion IPO across the line

HKT Trust has succeeded in raising HK$9.3 billion ($1.2 billion) from its Hong Kong initial public offering, but demand was thin and suggests the other billion-dollar deals that are expected to launch bookbuilding in the next seven days are in for a challenge.

These include New China Life Insurance, Chow Tai Fook Jewellery and Haitong Securities, which are aiming to raise at least $5.7 billion before year-end.

HKT Trust, which comprises the telecommunications business previously owned by PCCW, was viewed as a fairly attractive investment in a difficult market environment since it will have stable revenues and will pay almost all of its cash flow as dividends. Based on the IPO price, which as expected was fixed at the bottom of the range, the trust is offering a 2012 dividend yield of 9% based on the joint bookrunner consensus, or 8.9% if calculated against the management’s slightly more conservative earnings forecast.

However, institutional investors weren’t exactly rushing into the transaction, and it wasn’t until Tuesday afternoon that the bookrunners could finally go out with a message to investors that the order book was covered. Sources say that there was a shadow book before launch that suggested that the deal would get done, but with the Hong Kong stock market falling on five of the final six days of the bookbuilding, investors took their time to convert these indications into actual orders. And as the deadline drew closer, the market grew increasingly nervous that the deal may actually fail. A few large orders on the last day finally got the demand to a level where the entire base deal and the greenshoe could be allocated.

According to one source, institutional investors got scaled back slightly, but there was not a lot of excess demand.

Part of the reason is that other types of investors, including private banks and hedge funds, were largely absent from the deal. Hedge funds accounted for less than 5% of the demand and the 10% retail tranche attracted only about $14 million worth of orders, or less than 12% of the shares set aside for them.

Some Hong Kong funds were also unable to buy into the deal since HKT Trust doesn’t yet qualify for inclusion into the Hong Kong pension scheme, known as the mandatory provident fund. This is expected to happen in due course and could lead to additional buying then.

On the other hand, the 10% preferential tranche that was targeted to existing PCCW shareholders was oversubscribed and was upsized to about 19%. Pacific Century Regional Development, which is controlled by PCCW chairman Richard Li, and China Unicom, which together own 39.8% of PCCW, subscribed to their entitlements in full. And on top of that Li applied for an additional 200 million shares, which translates into 9.74% of the IPO.

Another $100 million worth of shares were said to have been allocated to Japanese retail investors through the Powl (public offer without listing) tranche. This took care of another 8.3% or so of the deal.

Sources notes that the POWL tranche, the Hong Kong retail offering and the shares allocated to hedge funds and private banks only add up to about 15%-20% of the deal. This is important since they are the groups most likely to sell in the first few days after the stock starts trading. So, less allocation to these investors should in theory result in less selling pressure. Of course, in the current market environment, nothing is certain.

The majority of the institutional demand came from Asia-based accounts, but there was also some interest from large global funds. The buyers are said to have included sovereign wealth funds and pension funds, which tend to like stable dividend-paying assets.

HKT Trust offered approximately 2.05 billion share stapled units at a price between HK$4.53 and HK$5.38 apiece. The base size accounts for 32% of the share capital and will result in a market capitalisation of HK$29.1 billion ($3.7 billion) – just above the HK$28.6 billion minimum valuation that PCCW had said was necessary for the spin-off of the telecom assets to go ahead. If the greenshoe is exercised in full, the deal size will increase to 35.1%.

PCCW will also distribute 5% of HKT Trust’s share capital to PCCW shareholders in two batches after the listing. This means that HKT Trust will end up with a free-float of at least 37% (40.1% including the shoe), although it is unclear whether the close to 10% stake that Li bought through the preferential offering will actually count towards the free-float. PCCW will continue to own between 59.9% and 63% of the trust.

HKT Trust is the first trust to list in Hong Kong and in order to fit under Hong Kong’s existing listing rules it has ended up with a fairly complicated structure, including the share stapled units that have three different components but will be traded as one entity. Li initially intended to list the telecom business as a business trust – a concept that is fairly common in Singapore – and was pushing the Hong Kong regulators to put a regulatory framework in place for such listings. However, the progress was quite slow, and during the summer, Li and the mandated banks changed course and started working on an alternative structure.

It is also the second-biggest IPO in Hong Kong since the equity sell-off started in August, following Citic Securities’ $1.7 billion share sale at the end of September.

The latest company to push ahead with plans to list in Hong Kong this year is Chinese brokerage firm Haitong Securities, which started pre-marketing for an IPO of about $1.5 billion to $1.75 billion yesterday. The company, which is already listed in Shanghai, plans to launch the institutional roadshow on December 1 and is aiming to price the deal after the US close on December 8.

It is offering about 13% of its share capital and has set aside 5% of the deal for Hong Kong retail investors. Citi, Credit Suisse, Deutsche Bank, Haitong International and J.P. Morgan are joint global coordinators as well as bookrunners. HSBC, Standard Chartered, Nomura and UBS are joint bookrunners.

HKT Trust is due to start trading on November 29. CICC, Deutsche Bank, Goldman Sachs, HSBC and Standard Chartered were global coordinators and bookrunners for the offering. DBS, J.P. Morgan and Mizuho were joint bookrunners with Mizuho acting as the Powl manager as well.