Private equity firm Permira last night sold just over half its remaining stake in Hong Kong-listed Galaxy Entertainment Group, raising HK$5.85 billion ($755 million). According to a source, the deal was backed by a reverse inquiry from a large long-only institutional investor and was marketed to just a handful of accounts, allowing the shares to be sold at a tight 4.1% discount to yesterday’s close.
UK-based Permira had been expected to reduce its stake in the Macau casino operator further and speculation of a block trade started almost immediately after Galaxy published its first-half earnings at lunchtime Monday, releasing its substantial shareholders and directors from the results-related blackout. Galaxy’s share price initially jumped on the earnings announcement (the numbers were slightly better than expected) and reached an intraday high of HK$22.95 shortly after lunch, but then fell more than 5% to finish the session at HK$21.75 – down 3.3% on the day.
Part of the selling may have been due to the fact that investors wanted to take some profit ahead of the management’s earnings call after the market close, but market participants also noted that short-selling in the stock picked up during the afternoon and several analysts warned in their earnings commentary of a potential placement risk in the stock.
The sell-off on Monday, perhaps together with the fact that the UK market was closed for a holiday, may have made Permira hold off on the sale for a day. And even after the share price gained 0.7% yesterday it wasn’t immediately clear whether it would choose to go ahead. In fact, for a long time it looked like it had decided not to.
A call eventually went out to four or five banks to bid for a transaction by 8pm Hong Kong time and a while later it appeared as if UBS had been given the mandate. However, investors still received no term sheet, causing further doubt whether there would be a transaction or not.
And then, late last night, it emerged that the deal had been sold by UBS to a small number of investors without the usual wide distribution of a term sheet. The buyers included both existing shareholders and new investors, as well as long-only funds and hedge funds. But the key thing, according to the source, was that Galaxy’s wish to have the shares go to large institutional investors was taken into account when marketing the deal. All of this should ensure a better share price performance than after Permira’s previous sell-down in September last year when the stock lost half its value in the following four weeks as disappointment about the block added to a general sell-off in global equity markets.
The identity of the investor responsible for the reverse inquiry wasn’t disclosed and nor was the exact size of its investment, but it was said to have bought a large majority of the shares. It was described as an investor that is already active in the sector, although it was unclear last night if it already owned shares in Galaxy itself and therefore may end up exceeding the disclosure threshold of 5% as a result of this investment. Either way, it will become one of the largest shareholders in Galaxy, which is 52%-owned by the family of founding chairman Lui Che-woo and its associates.
Last night’s trade comprised approximately 278.8 million shares, which represented 6.7% of the share capital and close to 53% of Permira’s remaining stake. The shares were marketed at a fixed price of HK$21, resulting in a 4.1% discount to yesterday’s close of HK$21.90.
The price is above the HK$17.70 per share that Permira achieved a year ago, thanks to a strong bounce in the share price – particularly in the first four months of this year. The stock reached a record high of HK$24.65 in early May, but then fell in line with a global sell-off in equities. Since July 26, it has once again been on a solid upward trend, gaining 25%.
The discount was also tighter this time around. The September 2011 deal accounted for 6.5% of the share capital, priced at a 5.1% discount and raised a total of $613 million. Morgan Stanley was the sole bookrunner.
Permira will still own about 250 million shares in Galaxy after the sale – a 5.95% stake valued at approximately $677 million, based on the placement price. Those shares are locked up for three months.
The private equity firm bought a 20% stake in Galaxy in October 2007, paying a total of $840 million, or HK$8.42 per share. At the time, this translated into a modest 6.4% discount versus the market price. Galaxy was Permira’s first direct investment in Asia outside Japan, but the its long history of gaming-related investments elsewhere was a significant endorsement for the Hong Kong-based company and its growth strategy in Macau, where it is competing against US casino magnates Sheldon Adelson and Stephen Wynn, as well as Macau’s own gaming tycoon, Stanley Ho.
Permira’s investment also left Galaxy with a substantially improved balance sheet and enough funds to provide a foundation for the development of the HK$16.5 billion Galaxy Macau resort, phase one of which opened on the Cotai strip in May last year. Phase two, which will virtually double the size of Galaxy Macau, is scheduled to be completed by mid-2015.
Galaxy said on Monday that its revenues more than doubled in the first six months this year to HK$28.3 billion from the same period last year, while adjusted Ebitda improved by 159% to HK$4.7 billion. Net profit increased to HK$3.4 billion from HK$378 million.
The improvement came despite a slowdown in the growth of gaming revenues in Macau in recent months and was attributed partly to the Galaxy Macau resort, which contributed only one-month of earnings in the first half of 2011.
Permira was founded in 1985 under the name of Schroder Ventures Europe and advises funds with a total committed capital of about €20 billion ($25 billion). Since its inception, its funds have completed close to 200 private equity investments. So far, funds or companies backed by Permira have made four investments in Asia. The latest one was announced on Friday last week, when Consumer Equity Investments Limited (CEIL) said that it had agreed to buy a stake in Japan’s leading sushi restaurant chain, Akindo Sushiro, at an enterprise value of approximately $1 billion. CEIL is an international company located in Ireland and backed by the Permira funds.
