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Carlyle Group has sold just over half of its remaining stake in China Pacific Insurance (Group) Co (CPIC) through a block trade, raising HK$5.61 billion ($723 million).
The timing of the deal took the market by surprise. It launched at 7pm on Friday, at a time when the stock was trading below the IPO price and following a profit warning by CPIC a week earlier. But investors liked the fact that the discount was wider than on any of Carlyle’s previous three sell-downs in the Chinese insurer and, when the order books closed after about four-and-a-half hours, there was enough interest to cover the deal.
The transaction fits into a recent trend that is seeing some investors switch from Chinese banks to Chinese insurers. At the same time, the size of the short positions in CPIC also added to the demand, while investors also like the fact that the stock is becoming more liquid as Carlyle continues to reduce its stake.
Together, these issues helped overcome the fact that European markets started to trend lower shortly after the launch due to more negative news surrounding Spain, and sources said close to 50 accounts came into the deal, including five to 10 “big guys”.
The private equity fund offered 220 million H-shares at a price between HK$25.50 and HK$26 each, which translated into a discount of 3.3% to 5.2% versus Friday’s close of HK$26.90. The price was fixed at the bottom of the range for the maximum 5.2% discount, which was no big surprise given the market backdrop and the fact that the deal was in the market on a Friday night. CPIC’s share price is down from a 2012 high of HK$28.50 in February, but is still up about 21.4% this year. It has also bounced back from a recent low of HK$21.65 at the beginning of June.
Some observers argued that the discount was tight, especially considering that the deal accounted for about 26 days of trading, based on the daily average in the past month. However, it was significantly wider than on Carlyle’s previous sell-downs through the capital markets, including the latest sale in July last year, which was slightly larger in size (241.12 million shares) but priced at a 3.3% discount. That trade did benefit from coming ahead of a fairly extensive pipeline of financial sector share sales expected in the second half of last year though.
The banks that were invited to bid for the Friday deal also weren’t too far away from each other in terms of the discount, sources said. The business went to Bank of America Merrill Lynch and Credit Suisse, which acted as joint bookrunners. Neither bank has been involved in any of Carlyle’s previous sell-downs in CPIC.
This latest transaction accounted for 9.5% of CPIC’s H-share capital and 2.6% of the company’s entire outstanding share capital, including the Shanghai-listed A-shares. The shares were sold by two separate Carlyle entities, Carlyle Holdings Mauritius and Parallel Investors Holdings.
According to a source, the buyers comprised a broad mix of investor types, including some existing shareholders who took the opportunity to top up their holdings. An early estimate suggested the demand was pretty evenly split between hedge funds and long-only investors, although the source said the number of Asia-based long-only funds was smaller than usual for a high-profile deal of this size — most likely due to the late launch.
Carlyle has previously given the impression that it wasn’t keen to sell below HK$28, which is where its Hong Kong IPO was priced, although as a pre-IPO investor it should be able to make a profit even below that price. It is unclear why it decided to do so now, especially since the share price has fallen about 16% since its previous sale in July last year, including a 0.9% drop on Friday. The previous sale, thanks to the tighter discount, also achieved a selling price of HK$30.90 per share, which is about 21% above the price it got this time around.
It is no surprise that Carlyle continues to reduce its stake though, and the fact that it launched on a Friday seems to have been driven by the fact that CPIC is about to head into a blackout ahead of its first-half earnings report. Carlyle is affected by this since it has two directors on the board.
The insurer said on July 13 that it expects its net profit for the first six months this year to drop by approximately 55% from the Rmb5.82 billion it earned in the same period last year. It attributed the expected fall to a “significant decline” in investment yields as well as a slow-down in business growth in the first half of the year. However, CPIC’s share price has actually gained 4.9% since that announcement. Analysts at Nomura suggested that this may be because a weak set of results is already priced in. They also noted that the profit warning removed a large part of uncertainty and suggested that investors may take some comfort from the fact that they know what is coming. At the same time though, they stressed that there is still a lack of earnings transparency with regard to the auto insurance business, which comprised 31% of the 2011 earnings.
Carlyle initially invested in CPIC’s life insurance unit almost six years ago, but the investment was converted into shares in the parent company before it went public. CPIC listed in Shanghai in December 2007 and in Hong Kong two years later. Before it started selling down in December 2010, Carlyle held 57.2% of the H-share capital.
Its initial sale was a privately placed transaction that raised $864 million and was announced on December 29, 2010 — about one week after Carlyle’s 12-month lockup from the Hong Kong IPO expired. That deal fetched a 0.6% discount and was arranged by UBS.
Less than two weeks later, in January 2011, it raised $1.79 billion from the sale of 415.2 million shares that was priced at a 0% discount to the latest close, or at HK$33.45 per share. However, that deal had two significant anchor investors — Allianz and Fairholme Capital — which together bought 82.5% and helped keep the price high. Goldman Sachs was the sole bookrunner.
And then in July last year, it raised $989 million from a deal arranged by Deutsche Bank, Goldman Sachs and Morgan Stanley.
According to a disclosure filing with the Hong Kong stock exchange, Carlyle also trimmed its stake slightly in January this year when it sold 18 million shares through an off-exchange transaction at an average price of HK$22.50 per share. One source said that sale was done to reduce the firm’s overall stake in CPIC to below 5%, which supposedly had some internal strategic significance. The sale took its holdings to approximately 4.9% from 5.1%.
Carlyle will still own 205.1 million H-shares in CPIC after this deal, which accounts for 8.9% of the H-share capital and 2.4% of the entire share capital. Based on the placement price, that stake is worth about $674 million. The shares are subject to a 90-day lockup.
