In a move that is likely to send shockwaves through the equity capital markets in Asia, Graff Diamonds early this morning decided to pull its initial public offing, making the $1 billion deal the latest — and largest — casualty of the volatile market environment.
There was little information available as to why Graff chose to call off the deal while it still had a full day of institutional bookbuilding to go. (The Hong Kong retail offering was due to close at noon today). However, there have been plenty of media reports in recent days suggesting that the deal was struggling and sources have confirmed that the order book was only about half-covered.
One source suggested last night that the company, an integrated producer and retailer of quality diamonds to the world’s ultra-rich, could get a deal done, but perhaps not at the terms that it desired. Some investors have argued that the valuation was a bit rich and when Tiffany & Co tumbled 6.8% on a single day last week after reporting disappointing first quarter earnings data, the shadow fell on Graff as well. Tiffany’s share price has fallen a further 1.7% during the three trading days since the major drop last Thursday.
Meanwhile, the Hong Kong stock market took another hit yesterday, dropping 1.9%. The market has been volatile since Graff started its institutional bookbuilding on May 21, but the overall loss has been capped at 1.4%. That said, markets in Europe and the US fell sharply overnight — the Dow Jones index lost 1.3% — offering little hope of a shift in investor sentiment on the final day of bookbuilding.
One source noted that there is a lot of event risk right now related to the upcoming Greek elections, and people feel they need to get paid to take on that risk. On top of that, they also need to take into account the fact that there would be an entire week between the pricing of the IPO and the start of trading, a week when they would be unable to respond to market movements.
Later Thursday morning, Graff issued a statement confirming that the IPO and the Hong Kong listing had been postponed “due to adverse market conditions”.
“The company enjoyed high quality engagement on its business and strategy from a very broad range of prospective investors, however consistently declining stock markets proved to be a significant barrier to executing the transaction at this time,” the Graff said.
Graff is the third Hong Kong IPO to call off or postpone their listing plans this week. On Monday, BMW dealer China Yongda Automobiles Services Holdings cancelled its IPO that was targeting between $306 million and $435 million after failing to attract much demand.
And yesterday, sources said that China Nonferrous Mining Corp (CNMC) put its $235 million to $314 million offering on hold, having already postponed the launch of the retail offering by one-and-a-half weeks. One source said the Africa-based copper miner wanted to give a couple of potentially big Chinese investors more time to look at the transaction and the deal may be resumed in the next few weeks if they can secure more orders. However, others seemed sceptical that the deal could be salvaged in the current market environment.
Graff was aiming to sell $850 million worth of new shares, while the wife of founder and chairman Laurence Graff was selling a further $150 million worth. The deal also came with a $150 million greenshoe that could have increased the total proceeds to $1.15 billion.
The shares were offered at a price between HK$25 and HK$37 apiece, which translated into a valuation of 18 to 24 times this year’s earnings. The deal accounted for approximately 29% of the company at the mid-point of the range and 33% including the greenshoe.
Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley were joint global coordinators and bookrunners, while HSBC was a joint bookrunner.
