Deal of the Year, Best Equity Deal, Best IPO, Best Privatization
China Construction Bank's restructuring and $9.23 billion IPO
Lead managers: CICC, Credit Suisse First Boston, Morgan Stanley
POWL: Daiwa SMBC, Nomura
Legal counsel: Herbert Smith, Skadden Arps, Freshfields, Davis Polk
Once China Construction Bank (CCB) had proved itself during secondary market trading, there was never any doubt in our minds that this was the deal of the year bar none. Indeed when pitching for this award, Morgan Stanley bankers lovingly dubbed it the 'deal of the decade'.
CCB ranks as the world's largest IPO in five years and the largest ever from Asia ex-Japan. Its size, valuation and subsequent trading level all go to show what a remarkable feat the bank and its lead managers were able to pull off.
One year ago, few people would have been prepared to bet that CCB would sail through the equity markets. Even fewer still would have been prepared to hazard a valuation of 1.96 times book value. To put this valuation into perspective, CCB listed at a premium to just about every major bank in Asia including global behemoth HSBC Holdings, which was then trading about 1.9 times book.
So how did it do it? The bank is certainly large. Excluding overseas assets, CCB has the second largest asset base of any domestic bank in China behind fellow gang of four member ICBC. At $472 billion, its asset base is bigger than Kookmin Bank, DBS and Standard Chartered Bank combined.
CCB's IPO represents the world's largest by a commercial bank and investors' faith in it is quite remarkable given it had to be stripped bare of all its past mistakes in order to be fit for listing. In many ways, CCB is a virgin bank with no discernable track record against which to gauge future performance.
Who is to say it won't make the same mistakes all over again? Six months ago, investors were arguing just this, with many saying they would pay no more than one to 1.2 times book value for a pure Mainland bank.
A number of factors helped them to get over this hurdle. One was the halo effect of Bank of Communications, which listed in Hong Kong four months earlier in June.
Despite being pitched as HSBC's China play, Bocomm's IPO still faced considerable resistance from institutional investors wary of potential black holes in the Chinese financial system. It was finally able to price at 1.65 times book largely thanks to the support of Hong Kong retail and corporate investors who continued to support the deal in the aftermarket, pushing it up to 2.02 times book by the time CCB priced in late October.
Bocomm provided a good platform to bring an IPO for CCB. It had pulled institutions up a steep learning curve and its trading pattern had given them confidence about investing in the Chinese banking sector.
But equally it was the considerable restructuring work that had taken place at CCB, which enabled the bank to hit the valuation it did. Of particular importance, was the seal of confidence offered by Bank of America, which spent $3 billion to acquire a 9% stake in the bank - the largest ever single foreign investment in a Chinese entity. Investors were not only comforted by the size of the investment, but also the fact that Bank of America placed 50 of its staff in key areas at CCB including IT and risk management, as well as on the corporate governance and audit committees.
At the time of the IPO, the leads also made sure they ticked all the right boxes to execute a successful deal. They sought a waiver from the Stock Exchange of Hong Kong to cap the maximum allocation to retail at 20%. This was done to ensure a more stable secondary market trading pattern, as retail have a habit of trying to make quick profits by flipping their shares.
They also built momentum based around a reasonable valuation range of 1.6 to 1.85 times book, then lifted it mid-way through roadshows after the book became multiple times oversubscribed. Final pricing came at HK$2.35 based on an order book of $80 billion, of which retail contributed $17 billion, local corporates $12.6 billion, private banking $19 billion, institutions $19 billion and the POWL $11 billion.
Like every successful IPO before it, CCB was able to leverage these different demand constituencies in order to secure a premium valuation. Many wonder whether it had pushed pricing too far and would trade down - if not immediately then certainly when the greenshoe was used up.
As it was, strong follow through buying proved the doubters wrong and the greenshoe was exercised in full. As of December 14, CCB was trading about 9% above issue price at HK$2.55 per share.
Its deal is a landmark and one which future bank IPO's from China will find hard to beat. For the Chinese government, the deal's success also provides a massive vote of confidence in the way they have restructured a financial system that was thought to be on the verge of collapse only a few short years ago.
Best M&A Deal, Best Domestic M&A Deal
Hite's $3.4 billion acquisition of Jinro
Sellside adviser: Merrill Lynch
Buyside adviser: UBS, KDB
Legal counsel: Herbert Smith, Woo Yun Kang Jeong & Han, Kim Chang & Lee, Horizon
This was a deal that was not only large, but also incredibly symbolic. In one transaction it signaled how far Korea and in many respects Asia has come since the financial crisis. It also created a new national champion in the beverage industry.
Jinro is Korea's largest soju maker, and as the maker of the national drink, it has one of the country's best and most cherished brands. It is to Korea what Guinness is to Ireland. However, through chronic mismanagement by its former chaebol owner - it had ventured into property development in the mid-90s - it ran up huge debts, which it later defaulted on. Goldman Sachs and a few key creditors bought its defaulted bonds and through these used the Korean legal system to put the company into bankruptcy - so that effective control passed from the Chang family. This allowed new management to come in and turn the company around.
The creditors, however, knew they would only realize value from their investment if the company could be sold in an auction. The Korean bankruptcy court therefore hired Merrill Lynch to get the company ready for a sale and organize an auction. There were no shortage of bidders - from Korea, Japan and elsewhere.
UBS and KDB were mandated to advise Hite, the Korean beer company. At the outset there were many people who saw Hite as an outsider, especially since the Doosan Group was much more vocal about its interest. Many also thought that Hite did not have the financial firepower to make a bid in the W3 trillion range.
UBS, KDB and Hite addressed this issue by putting together a local consortium of private equity money, which included KDB, the Military Pension Fund and KCTU Teacher's Fund. This turned out to be a smart move, since it not only brought cash to the table, but just as importantly 'Korean' cash. It should be remembered that as the bids were being made in March, Korea was going through a backlash against foreign private equity firms, which were perceived to have pillaged the country after the crisis. Given that Jinro was the national drink, this was an even more sensitive issue.
So UBS and KDB crafted a very Korean solution and by bidding through the psychologically critical W3 trillion mark, surprised all the other bidders. Hite's winning bid created a formidable new liquor company, with a strong Japanese business and great potential in China. It also kept the company in Korean hands.
One stumbling block was the fact that Hite also had a small soju business, and antitrust issues therefore came into play. In the event, the Fair Trade Commission gave the deal its blessing. However, that did add some closure risk for the sellers.
Numbered among these sellers were the foreign creditors - Goldman Sachs and Morgan Stanley being two of the biggest - and managed to exit their investment with sensational returns (Goldman made well in excess of $500 million, having invested back in 1998).
This soju saga says a lot about how much Korea has changed. One of Jinro's most critical aspects was that it vindicated creditor rights, and sent a strong signal to the other families running corporate Korea. Indeed, the deal showed that the Korean bankruptcy court procedures worked - something that is not necessarily true in many Asian countries.
Adding complications to the mix, this was a transaction that involved three legal jurisdictions (Korea, Japan and Hong Kong) and millions of hours of legal work. All the advisers can take credit for a job well done. In Merrrill Lynch's case, it did an excellent job of realizing a superb valuation for a company that had only a year earlier been valued at W1.3 trillion (Merrill sold it for W3.4 trillion).
For everyone that had a vested interest - from government through to Jinro employees and foreign creditors - this was a sensational 'win-win' transaction that symbolized the positive changes taking place in the new Korea inc. It also began the significant trend of involving local private equity, and this will surely become a critical component of the Korean M&A market in the future.
Best Cross-Border M&A Deal
CNPC's $4.18 billion acquisition of PetroKazakhstan
Sellside adviser: Goldman Sachs
Buyside Adviser: Citigroup
Legal counsel: Leboeuf Lamb & Oslers
This award was one of the tougher ones to adjudicate. There have been no shortage of landmark cross-border M&A deals this year - with StanChart buying Korea First, San Miguel buying Australia's National Foods and Philip Morris buying Sampoerna in Indonesia. Symbolically, there was also Lenovo's acquisition of IBM's PC business - a deal that straddled this year and last and triggered a wave of optimism about Chinese blue chip companies going global.
One of the reasons we settled on the CNPC acquisition was that we felt it reflected one of the year's stronger themes: oil and the desire by China to buy reserves. One of the year's highest profile M&A transactions, in fact, was CNOOC's attempt to buy US oil major, Unocal. That politically-fraught deal failed, and hence made it vital that national oil major, CNPC did not fail in the subsequent Chinese bid for PetroKazakhstan.
In this case, it was up against a strong bid from India, and an attempt by the Russians to veto the bid in court - making this emblematic of the new 'Great Game' being played out in Central Asia over energy resources. In the event, CNPC managed to win the deal with a $55 bid that valued the asset at $4.18 billion. In doing so, it purchased a company with proven and probable reserves of 550 million barrels of oil equivalent and 2004 production of 151,000 barrels per day. This represents a 16.6% increase in CNPC's reserves and a 26.5% increase in its production levels.
CNPC was helped in its bid by the synergies that will naturally flow from its ownership of a pipeline that already goes to Kazakhstan. And its bid was helped by Citi's advice and financial clout: one condition of the bid was that Citi had to commit to underwrite the full amount via a three-month revolving letter of credit. Minus this standby letter of credit from Citi, CNPC's bid would have been declared invalid under the terms of the auction. In the event, CNPC has chosen to pay for the deal via its own significant cashpile and other sources, rather than use the Citi loan facility.
Perhaps one of the more surprising aspects of the deal was that it closed in around three months, which is remarkably quick given its size and the complex nature of the asset (with certain fields owned in equity partnership with Lukoil). Indeed, it was Lukoil's pre-emption rights that led to the court battle, in which it tried to block the sale - albeit unsuccessfully.
In terms of pure M&A mechanics, the asset was listed in Canada and a plan of arrangement was used to ensure that CNPC would get control and the ability to delist PetroKazakhstan in the event that more than 60% of the shares were tendered.
For Kazakhstan, this was a deal of great importance, signaling its long-term partnership with China - a country whose oil need is only going to grow as it runs down reserves in its own fields. And in an environment of rising oil prices, this was a highly competitive deal where the stakes were high and much nerve was required. As such it should come as little surprise that this became the largest ever cross-border M&A deal to be completed from China.
Best Secondary Offering
ICICI Bank's $1.75 billion concurrent ADR and domestic share sale
Lead managers: DSP Merrill Lynch, JM Morgan Stanley, Nomura
Legal counsel: Davis Polk, Amarchand & Mangaldas & Suresh A. Shroff & Co, Latham & Watkins, Khaitan & Co
This was the hardest category of all to judge this year, as there have been a handful of landmark transactions that were superbly executed and went on to trade well. Alongside ICICI Bank, we also shortlisted the $2.189 billion follow-on by Korea's LG Philips LCD in July and the $2.56 billion follow-on for Taiwan's Chunghwa Telecom in August.
In the end we decided that ICICI Bank had a slight edge. Its deal tops another record-breaking year for India's equity capital markets. Symbolically it underlines the country's emergence as one of the most important investment banking markets in Asia. It is a market which global investment banks can no longer ignore and for some it is now as strategically important as China.
ICICI Bank's transaction encapsulates how far India has come since the stock markets began to take off in 2003. It also highlights the considerable hurdles issuers and investment bankers still face when navigating deals through the ever changing regulatory maze imposed by the country's national regulator, Sebi.
The deal set a number of records. It represents Asia's second largest primary follow-on capital raising of the year following a $2.75 billion deal for PetroChina in August. It is the largest primary equity offering ever from India and the second largest of any kind following ONGC's $2.34 billion privatization in 2004.
It also marks the first time an Indian entity has been able to concurrently execute a domestic issue and an ADR tranche, not to mention a POWL tranche. In doing so, ICICI Bank had to comply with new guidelines from both the US SEC and Sebi.
Where the latter is concerned, there were a number of irritations that made smooth execution challenging. Chief amongst these are new regulations concerning minimum floor prices for offshore offerings. ICICI got round this one by securing a waiver.
Secondly, the regulator now requires international investors to put up a 10% deposit if they wish to participate in domestic offerings. In turn, lead managers are required to allocate accounts pro rata and have no discretion in weighting paper towards long-only accounts.
The leads also needed to secure waivers from the US and India to make sure the two tranches settled on the same day. Normally, the US operates on a T+3 basis, whereas in India the timeframe is a much longer T+12 to T+15 settlement period.
On top this, there were also technical issues concerning ICICI Bank's foreign ownership limit. Pre-deal, foreign investors owned 73.5%, just below the 74% limit.
The leads, therefore, needed to make sure they handled the two tranches in such as way the limit was not breached. The domestic share sale was sized at $1.08 billion and the ADR tranche at $433 million, with the POWL accounting for a further $108 million. This meant the foreign ownership level dropped to about 70%, providing some headroom for additional foreign buying in the aftermarket.
In the run up to the deal, ICICI Bank's share price had come down steadily from a high of Rs600 at the beginning of October. The share sale appeared to have created a slight overhang in the domestic market, but not in the US where the ADR premium actually widened rather than narrowed. In the end the ADR was priced at an 18% premium to spot and the local share sale at a 1% discount to spot - the tightest ever for an Indian follow-on offering.
ICICI appeared to have timed its deal well. After a poor performance in October, the Sensex recovered in November, shooting back past 9,000 and proving wrong those who believe the Indian market is overbought.
For ICICI Bank, the deal was a significant one. It now has enough capital to expand its asset base for a further three years. For investors, the deal has made money. Yesterday, the stock closed at Rs571.45, up 9% from its issue date on December 6.
Best Equity-Linked Deal
First Pacific Holding's $198 million exchangeable into PLDT
Lead manager: UBS
Legal counsel: Linklaters, Allen & Overy
In previous years it has been difficult to find many equity-linked deals worthy of an award. Intense competition for mandates has resulted in a continuous slew of mis-priced deals. This year there have been signs of change.
Investors' willingness to move back down the credit curve has bought new markets to the fore, most notably Indonesia where there have been a number of transactions over the past six months. What most of these deals share in common is a high degree of structuring - investors may have re-discovered some appetite, but they still require a high degree of comfort and a structural safety net.
First Pac's main competition to win this award came from Indonesia where JPMorgan crafted a highly structured exchangeable for Bumi Resources. However, in the end we decided the deal more closely resembled structured equity than a true equity-linked transaction.
As such First Pac had an edge and it was a truly bold deal. It was completed back in January and its success clearly signaled a new direction for the Asian equity-linked market. It also underlined just how far the Hong Kong-listed First Pac group has been able to transform its fortunes since 2002 when it was embroiled in a major liquidity crisis and a very public spat between its major shareholder Antoni Salim and executive chairman Manny Pangilinan.
The lead's major challenges were selling the credit of a holding company with a history of cash flow problems and the equity of an emerging market stock that was then only trading about $4 million a day because it was listed in a country (the Philippines) where liquidity had completely shriveled up and the government was facing an imminent credit downgrade because of its ballooning budget deficit.
Indeed, there had not been an equity-linked deal from the Philippines since 1998 when First Philippine Holdings completed a much smaller $36 million offering.
Pinpointing a valuation for First Pac was also complicated by a number of factors. Firstly, there were no clear credit comparables and secondly PLDT had not yet confirmed whether it was going to resume dividend payments in 2005.
About 60 investors came into the book and they have been well rewarded for their faith in the group. The deal is currently one of the best performing of the year with a current bid price around the 115% level.
Best Reit Deal
The Link Reit's $2.8 billion IPO
Lead managers: Goldman Sachs, HSBC, UBS
Financial advisor to the Hong Kong government: JPMorgan
Legal counsel: Linklaters, Allen & Overy, Clifford Chance, Shearman Sterling
This is the first year we have introduced a category for best Reit and we view it as an acknowledgement of the growing number of Asian Reit deals and their enthusiastic reception by local investors.
No deal better captures this trend than Link Reit - the privatization of retail and carparking facilities owned by the Hong Kong Housing Authority (HKHA).
The transaction was a benchmark on a number of levels. It not only represents the first Reit to be listed in Hong Kong, but also ranks as the world's largest ever Reit or property related IPO. On top of this, the deal stands as the largest Hong Kong government privatization to date and the largest IPO by a Hong Kong issuer since 2000.
The Hong Kong government considers the deal as a key milestone in its privatization programme. By divesting 100% of the HKHA's retail and car park facilities, it enabled the government body to re-focus on its core function of providing subsidized public housing. At the same time, the divestment means operational efficiencies should increase as the Link management are no longer subject to the same public sector constraints and social responsibilities of the HKHA.
The deal had been de-railed in 2004 by litigation from an elderly pensioner. In 2005, the leads and government made sure they had all the bases covered.
They were also able to draw on 2004's experience to ensure a more balanced allocation process. In the previous year, institutions had ended up with just 9.9% because so much had to be placed with retail investors or had been promised to a group of cornerstone investors. This year, the cornerstones were dropped and this allowed institutions to be allocated 26.6%.
At the time the deal was completed in late November, the Hong Kong market was turning. The deal was not subject to the same kind of IPO mania as its predecessor in December 2004. A lack of immediate trading gains by CCB and high margin finance rates kept a lot of speculative investment at bay during the primary market process.
Instead it all poured into the secondary market. Link Reit's secondary market trading performance has defied all expectations and continues to do. Stock price performance has been spurred on by the intentions of hedge fund TCI, which now owns 17.95% in the Reit and has a reputation for shareholder activism.
The Reit was priced at HK$10.3. Yesterday it traded through HK$15 for the first time, an increase of 46%.
Best Mid-Cap Equity Deal
Kumho Tire's $363 million IPO
Lead manager: JPMorgan
Legal counsel: Simpson Thacher Bartlett, Shin & Kim, Davis Polk, Kim & Chang
This category is always one where there are a multitude of quality deals and companies to choose from. This year, we decided that Kumho Tire deserved the award because its IPO was a well executed deal with symbolic importance for both Korea and Asia too as the region shakes off the last vestiges of the Asian financial crisis.
Kumho Tire is the first Korean company to secure a dual listing in Seoul and London. It is also a company that went through a forced sale and debt restructuring as a result of the financial crisis.
At its height, Kumho Industrial was one of the most heavily indebted groups in Korea and opted to hive off its tire manufacturing arm in order to reduce its gearing levels from 390% at the end of 2002. It managed to scupper a bid by private equity firms JPMorgan Capital Partners and the Carlyle group. Instead, a major stake was sold to Korea's Military Mutual Aid Association (MMAA), with a view to Kumho Industrial buying it back once it had overcome its debt problems.
And indeed the IPO enabled Kumho to re-gain management control of the company, while the creditors and MMAA were able to exit at a profit. As a result of the deal, which constituted primary and secondary shares, the MMAA dropped from 50% to 25%, while creditors dropped from 20% to 14%, Kumho Industrial retained 21% and a further 29% went into the freefloat.
Similar to Chinese IPO's, the lead also secured a strategic investor in the form of Cooper Tire, based in the US, which took up 11% of the company.
This presented the lead with one of its more challenging problems since the KSE had not previously regarded strategic placements as part of an IPO. And under existing regulations, there is a six-month pre-IPO lock-up designed to prevent changes to a company's shareholding structure. The problem was solved byobtaining a waiver.
A second problem concerned the company's debt to equity ratio. At 181.05% (as of September 2004), this exceeded a pre-listing requirement that no company exceed an industry average of 1.5 times. This was overcome by persuading the regulator to amend its guidelines and the ratio was raised to either an industry average of two times or a KSE average of two times.
Kumho Tire's IPO worked because the company fits into a clearly defined category that appeals to international investors who are on the look out for high quality low cost manufacturers that are starting to build up global brand name recognition and secure a foothold with international consumers.
Best Small-Cap Equity Deal
Tradelink Electronic Commerce HK$335 million IPO
Lead manager: DBS Asia Capital
Legal counsel: Simmons and Simmons, Deacons
We define small-cap equity deals as offerings below $100 million and this deal fits nicely into that space. In fact, this is probably the smallest Hong Kong government privatization we have ever given an award too.
Tradelink is an internet portal for facilitating customs forms filed with the Hong Kong government. It is a very stable business, but in order to foster competition in the sector, the government decided to sell down its major stake (other key shareholders include Swire and PCCW).
What makes the deal more interesting was its strategic importance for the government. As is well known, the Hong Kong government had made selling the Link Reit a priority and this deal was an effective way to test the water in the markets. Just like the Reit, the HK$335 million IPO was marketed by DBS as a yield play - with a 7% dividend yield - and hence was able to gauge demand for yield products, particularly among retail investors at a time of rising bank rates.
After the success of this deal, which saw 34.5% of the company sold and was 144 times oversubscribed on the retail tranche - the government could fairly conclude that yield products were still enormously enticing and go forward with Link with a good deal more confidence.
The deal was launched into a falling market in October. But clearly, the yield story proved effective, since the deal priced at the top end of the range at HK$1.25 and subsequently traded up 7.2% on the first day of trading. Year to date it is up 15.2%, which suggests an ideally priced deal.
This is all the more remarkable when you consider that it priced at a time when seven other deals were pulled or postponed, and most other deals launched at a similar time all traded down on the first day (such as Kasen International, Sincere Watch and Guangdong Nan Yue). And all that in spite of going 'head-to-head' with China Construction Bank, and the massive amounts of liquidity it was sucking up (the deals priced on the same day).
All in all, this constitutes a small, but beautifully formed deal.
