Temasek Holdings confirmed in a disclosure filing yesterday that it sold its entire stake in Hong Kong-listed wind power producer Huaneng Renewables last week, raising a total of HK$435.5 million ($56 million).
The shares were crossed on the Hong Kong stock exchange in the morning of July 17, but there was little information about the sale, which was done through a club deal. The number of shares that changed hands indicated that the seller was either Temasek or State Grid, but the general belief was that it was Temasek that had offloaded its stake.
Morgan Stanley, which arranged the transaction, declined to comment.
However, because Temasek’s stake exceeded the 5% disclosure threshold it was required to notify the stock exchange within three business days of the settlement of the trade on July 18.
The most interesting thing about the deal wasn’t the secrecy surrounding it at the time, though, but the fact that Temasek chose to use a club deal rather than a traditional block trade. In other words, the bankers approached only a small number of potential buyers instead of sending out a term sheet to the wider investor community.
Club deals became popular last year as a way around low liquidity and selective investor appetite. By marketing a deal to a small but targeted group of investors, bankers were able to achieve a better price for the seller. The latter was also typically happy to pay a proper fee for such solutions, which made them an attractive proposition for the banks amid increasing competition for block trades.
If the deal is sold to just a small number of investors, there tends to be less selling pressure on the stock after the transaction as each buyer will typically get a greater number of shares and will be more inclined to hold on to them.
There haven’t been too many sizeable club deals this year, but CVC Capital Partners and Royal Bank of Scotland used this structure for their final two sell-downs in Samsonite in January and March, which raised a combined $817 million.
Meanwhile, the private placements of new H-shares in Sinopharm and Sinopec earlier this year followed a similar principle since the shares could only be sold to a maximum of 10 investors. Those two deals raised $526 million and $3.1 billion, respectively. Bankers say they expect both private placements and club deals to become more frequent as the secondary markets remain challenging and investors look for less risky deals.
At only $56 million, Temasek’s exit from Huaneng Renewables was quite small and hence it –and its bankers — may not have seen much point in offering the shares to the wider market. However, the shares accounted for 5.3% of the H-share capital and 6.5 days of trading based on the daily volume in the past two weeks, which isn’t insignificant. And that makes it more likely that Temasek chose to use a club deal to get the best possible price at a time when investors have been asking for wider discounts to compensate for the jittery equity markets.
The liquidity in the secondary market has also fallen significantly in the past few weeks, partly because many investors are choosing to wait on the sidelines for a less volatile market, partly because of the summer holidays, making even smaller transactions more risky in terms of their potential impact on the secondary market.
Temasek sold all its 155.5 million shares at a fixed price of HK$2.80, which represented a discount of 5.7% versus the latest close of HK$2.97. The stock had risen 6.4% in the past couple of sessions and on the day of the deal it finished just 2 Hong Kong cents below the 2013 high that it reached the previous week.
Temasek bought the shares in Huaneng Renewables when the wind power producer went public in Hong Kong in June 2011. It invested a total of $50 million at the IPO price of HK$2.50 per share, which means that it has received a capital gain of 12% over a two-year period. While this is perhaps not too bad, it is below the 8.9% shareholder return that Temasek generated across its $173 billion portfolio in the year to March 2013 and well below the annual return of 13% that it has achieved in the past 10 years.
However, had it used a widely marketed block trade, it is likely that it would have had to offer a wider discount, resulting in any even lower return.
Temasek hasn’t commented on why it decided to sell its position in Huaneng Renewables, but it does tend to actively manage the part of its portfolio that doesn’t consist of core investments. The Singapore investment company does have a stated strategy to increase its focus on energy and resources and this sector accounted for the largest portion of Temasek’s net investments in the 12 months to March. Most of those investments were made into companies based outside of Asia, though. As of the end of March, 6% of Temasek’s portfolio value was in the energy and resources sector.
Only a few days before the Huaneng Renwables transaction, Zurich Insurance Group sold a quarter of its stake in New China Life Insurance through another club deal, raising HK$2.19 billion ($283 million). Like Huaneng Renewables, the deal was placed with a small group of investors — sources estimated the shares went to no more than five or six accounts — and didn’t become known to the wider market until the shares were crossed the next morning.
The deal was anchored by two large orders, one of which was from a sovereign wealth-fund, and the bulk of the shares went to one quasi-strategic buyer, one source said.
It was done at a fixed price of HK$22.50 per share, which translated into a discount of 6.4% versus the latest close. At first glance that may look pretty reasonable for a deal that accounts for about 3.1% of the company, but because the share price jumped 5.5% on the day of the deal it was actually pretty tight. In all likelihood, the seller wouldn’t have been able to achieve that good a price if the deal had been offered to the wider market, sources say.
Zurich was a pre-IPO investor in New China Life, which listed in Hong Kong and Shanghai in December 2011, and it has been expected to reduce its holdings ever since the IPO lock-up expired in December last year. The share price was trading above the IPO price of HK$28.50 early this year, but there may have been few windows for Zurich to take advantage of that due to the earnings-related blackout. The stock briefly returned above the IPO price in May, but since then it has been on a steady decline.
As reported earlier, the Swiss insurer decided to sell the shares as it wanted to reduce its financial exposure to “a large single holding of shares”. Zurich still owns 292.5 million H-shares, which account for 28.3% of the H-shares and 9.4% of the company’s total share capital. Based on yesterday’s closing price, the position is worth about $818 million. The remaining shares will be locked up for three months. The club deal was arranged by Goldman Sachs.
As of yesterday, New China Life was trading 3.6% below the placement price at HK$21.70. Huaneng Renewables held above the deal price for the first two days but yesterday closed 1.8% below at HK$2.75. The Hang Seng Index has fallen 0.1% since the New China Life trade, but is up 0.5% since Temasek sold its shares in Huaneng Renewables.
Notable club deals last year included a $755 million sell-down in casino operator Galaxy Entertainment Group by private equity firm Permira, CVC’s $1.6 billion placement in Formula One to three investors, which was done just ahead of the planned IPO, and Dai-ichi Life Insurance’s $236 million exit from Taiwan’s Shin Kong Financial through a series of three club-style transactions.
