Kunlun Energy has raised HK$10.48 billion ($1.35 billion) from a top-up placement of new shares as it seeks to accelerate the expansion of its liquefied natural gas business. The deal is the first ECM transaction in Asia in the second quarter, and encouragingly it made money for investors straight away, setting a positive trend that should make it easier to push out other trades in the pipeline.
The company is controlled by PetroChina, which is China’s largest producer of oil and gas, and listed in Hong Kong as a red-chip. Kunlun, which until March 2010 was known as CNPC, is involved in exploration and development of oil and gas fields in mainland China, Kazakhstan, Oman, Peru, Thailand, Azerbaijan and Indonesia, and also sells natural gas to end-users in China. The company aims to become the largest such seller in China as part of a strategy to substitute oil with natural gas. A key focus is to develop a business that is greener, saves more energy and results in lower emissions, it says on its website. The company is planning to build 15 new LNG plants.
Investors and analysts like the company and the industry and despite the large size, the deal was said to have been more than two times covered. Part of the reason was that investors treated the deal as a liquidity event that gave them the opportunity to get exposure at a decent discount. A lot of existing shareholders participated, but the deal was also supported by one large international investor that acted as an anchor investor and took a big chunk of the deal. Its investment helped the bookrunners push the price slightly above the bottom of the range.
According to sources, the anchor investor was RRJ Capital, a private equity fund set up by former Goldman Sachs banker Richard Ong, who previously ran Hopu Investment Management. Temasek Holdings also participated in the deal, although in a smaller size, one source said.
Bankers declined to comment on how big a portion of the deal that RRJ bought, but said it was less than half of the total deal and the fund didn’t get 100% of what it ordered. The Financial Times reported on Tuesday that RRJ and Temasek together bought about $600 million worth of shares, which would translate into approximately 44% of the overall placement. The FT noted that this isn’t the first time that RRJ and Temasek has teamed up to invest in clean energy. Last year they invested $250 million into Nasdaq-listed Clean Energy Fuels, a provider of natural gas fuel for cars in the US.
The top-up placement, which was launched at about 7pm on Monday and priced and allocated just before the opening of Hong Kong trading the following morning, consisted of 800 million shares, or about 11.1% of the existing share capital. The shares were offered at a price between HK$13 and HK$13.50, which translated into a discount of 4.8% to 8.3% versus Monday’s closing price of HK$14.18.
The demand was pretty price sensitive and when the order books closed at about 10.30pm Hong Kong time, there was a deal only at the bottom of the range. However, in light of the well-covered book (there was said to have been decent demand up to the mid-point) the issuer asked the six bookrunners to see if they could move the price slightly higher. So, just after midnight, they returned to investors to see if this could be done.
And supposedly it could, because the following morning the price was announced at HK$13.10 – 7.6% discount to Monday’s close.
About 140 investors submitted orders but, according to a source, about 70% of the shares were allocated to the top-10 investors and many investors got scaled back significantly. This helped support the stock the following day. Kunlun’s share price fell 3.1% to HK$13.74 on the day, but finished a 4.9% above the placement price – a very strong outcome on the back of a dilutive placement.
The deal came on the back of a rally in Kunlun’s share price with the stock up about 40% since late December.
The buyers of the placement included some hedge funds that came in with very orders, long-only funds as well as existing shareholders that were said to have been somewhat prioritised in terms of allocations.
The company’s recent earnings release showed that it had $1.5 billion of cash and cash equivalents on its balance sheet at the end of last year, but according to a source, most of that money is targeted at future asset injections from PetroChina – hence the need to raise more cash for the development of its existing businesses. In a statement issued by Kunlun on Tuesday, it said that aside from supporting the development of its “gas in substitution of oil” strategy, the placement funds will also put the company in a position to capture future expansion and acquisition growth opportunities as and when they arise.
The deal was led by Bank of America Merrill Lynch, CICC, Citi, Deutsche bank, Morgan Stanley and UBS. According to the Kunlun announcement, Deutsche Bank was the sole lead global coordinator.
