Aboitiz spin-off attracts strong offshore demand

Aboitiz Power Corporation will raise at least Ps10.09 billion ($218 million) from its initial public offering after fixing the price just above the mid-point of the indicated range. This came after the international tranche, which accounted for 70%, was multiple times subscribed when it closed last Friday. According to sources, the deal was fully covered after only three days of bookbuilding.

Sole global coordinator and bookrunner UBS has also allocated a 15% greenshoe to international investors, which means the company looks set to raise as much as $251 million from the total offering assuming good buying support in the secondary market as well. Including the greenshoe, the deal will account for 27% of the company's enlarged share capital.

The remaining 30% of the total deal will be sold to domestic investors in a separate offering that will be arranged by BDO Capital & Investment Corp and will run from July 4 to 10.

The power generator and distributor, which is a spin-off from Manila-listed conglomerate Aboitiz Equity Ventures, is the first IPO of size out of the Philippines this year which gave the deal some scarcity value. However, investors have had a chance to buy into this market through a couple of so called “re-IPOs”, which are essentially fully marketed follow-on offerings by companies that have previously been largely out of play for international investors due to a very limited free-float.

As these follow-on deals result in a significant increase to the free-float and the liquidity in the stock – and oftentimes leads to a higher valuation as well – they are typically regarded as IPOs both by the investment banks arranging them and the international asset managers who buy them.

In early June, conglomerate Alliance Global Group raised $445 million from such a follow-on deal through UBS, which ranked as the second largest Filipino equity offering ever, and in February Rizal Commercial Bank sold $102 million shares through a CLSA-led offering that also fit the re-IPO bill.

Aboitiz Power offered a total of two billion new shares through the IPO, including a greenshoe of 260.87 million shares, at a price between Ps5.25 and Ps6.25. The price was fixed at Ps5.80, which values the company at 14.6 times its projected 2008 earnings and positions it as a premium player in the sector.

The valuation translates into a 14% premium to Manila Electric Company, or Meralco as it is widely known, and a 17% premium to First Generation, which are viewed as its two key comparables.

Observers say the valuation looks expensive at first glance and a key challenge during the roadshow was to make investors comfortable with those numbers and convinced that the management will deliver on its acquisition strategy.

“This is clearly a growth story and people are buying it on the expectation that it could triple or quadruple in size over the next five years,” one observer say. Part of the growth will come from greenfield projects, but the key element will be acquisitions as the government continues to privatise its power assets, he adds.

In December last year, Aboitiz and its Norwegian partner SN Power Invest won the bidding for the 360 megawatt Magat hydroelectric plant that was being sold by the government through the Power Sector Assets and Liabilities Management Corporation (PSALM). The SN Aboitiz Power JV (SNAP), in which Aboitiz owns 50%, paid a total of $530 million for the plant that was previously operated by the National Power Corporation.

According to a source, the international offering attracted $575 million worth of demand from 57 accounts excluding $50 million that was reserved for two pre-agreed, but undisclosed, cornerstone investors. This meant the remaining portion for the deal was about 3.4 times subscribed before the allocation of the greenshoe. Based on the 70% of the deal that was actually available to international investors, the offering was 5.6 times covered pre-shoe and 4.6 times post-shoe.

The demand was said to have been very long-term in nature and split fairly evenly between the three main geographies with 39% coming from Asia, 30% from the US, 24% from Europe and 7% from the Middle East.

Aside from Aboitiz’ aggressive expansion strategy, the other selling points included the company’s vertical integration of generation and distribution and its exposure to hydro power, which is considered a renewable energy source.

As of the end of March, Aboitiz had a 50% stake in the company operating the 70MW hydropower Bakun plant and also operates 15 mini-hydroelectric plants in Northern Luzon and southeastern Mindanao. The company’s combined attributable capacity in these plants amounts to 73.2MW. In 2006 they generated a total of 412.8 GWh of electricity, of which 285.4GWh were attributable to the company.

Including the acquisition of the Magat plant by SNAP (which was consolidated in April), its attributable installed hydropower capacity has increased to 253.2MW.

Aboitiz also currently owns 158MW of installed capacity in plants fired by a blended oil mixture referred to as Bunker C fuel, including interests in two plants with a combined capacity of 120MW that it bought in June this year. Excluding those two, the total generation by the company’s Bunker C-fired plants last year was 418.7GWh, of which 85.3GWh were attributable to the company.

The distribution assets were all acquired from its parent company in January this year and include the second- and third-largest privately-owned distribution utilities in the Philippines both in terms of number of customers and amount of electricity sold.

Including the distribution assets, the company would have posted a 7.8% increase in operating revenue in 2006 to Ps8.68 billion ($179.9 million). However, in that same year, net profit declined by 24.3% to Ps1.87 billion ($38.8 million).

Aboitiz Equity Ventures, which will own 73% of the company after the listing, also has interests in banking, transportation and food manufacturing.

The trading debut is currently expected to take place on July 16.