The Dutch parent company of Hong Kong-listed ASM Pacific Technology last night sold a 12% stake in the Hong Kong subsidiary through a block trade, raising HK$4.27 ($550 million).
The deal, which was well received and upsized in full, came after the parent company, Amsterdam- and Nasdaq-listed ASM International, appointed two financial advisers in May last year to look into how to reduce the valuation gap between the front-end part of its business, which is operated by ASM Pacific, and the back-end part, which is operated by an unlisted subsidiary.
Some of ASM International’s shareholders had been complaining that the market undervalued the unlisted business and the intention was to take some kind of action to lift the valuation of the business as a whole.
Based on the current market valuation of ASM International’s 52% stake in ASM Pacific, the implied valuation of the unlisted business is a negative €70 million ($91 million), according to a source. This is well below the €550 million that research analysts value the same business at, he said.
ASM International and its subsidiaries design and manufacture equipment and materials used to produce semiconductor devices. ASM Pacific makes production solutions for wafer processing, while the unlisted business unit focuses on equipment for assembly, packaging and testing.
In a press release issued in connection with yesterday’s share sale ASM International said the alternatives investigated by the two advisers, HSBC and Morgan Stanley, included a full or partial placement or sale of its 52% stake in ASM Pacific, a spin-off of the same shares, and several merger alternatives.
After taking into account the various operational connections between the front-end business and the back-end business as well as potential accounting, legal and tax implications and execution risks, the company said that its management and supervisory boards have concluded that a partial secondary placement of 8% to 12% of its stake in ASM Pacific is “the most suitable step to be taken to address the non-recognition by the markets of the value of the combined businesses of the company.”
This step also takes into account the equity market capacity and the ongoing corporate stability of ASM International and ASM Pacific and “provides flexibility for further action, if deemed appropriate,” it added.
The parent company also said that it intends to distribute approximately 65% of the cash proceeds from the block trade to its shareholders, equal to approximately €4.25 per ordinary share. The rest of the money will be used to further strengthen the business.
It added that certain of its major shareholders, representing approximately 27% of the total share capital, had been consulted in advance and had expressed their support for the proposed action.
In all, this backdrop overshadowed the fact that the deal hit the market on a day when the Hang Seng Index lost 1.5% to dip into negative territory for the year, weighed down by lingering concerns about the weak economic data out of China earlier in the week. ASM Pacific’s own share price dropped 2.1%, although the stock is still up 2.4% since the beginning of the year.
Although the company said had decided to divest an 8% to 12% stake in ASM Pacific, the bookrunners went out with a slightly more aggressive offer as the base deal of 39.9 million shares represented 10% of the company. However, the demand was strong enough to for the overallotment option to be exercised in full as well, bringing the total deal size to 47.4 million shares, or the full 12% stake.
The shares were offered at a price between HK$88.88 and HK$91.77, which represented a discount of 5% to 8% versus yesterday’s close of HK$96.60. The highly auspicious number at the bottom of the range was said to be largely a coincidence as the seller was more focused on the fact that the discount shouldn’t be more than 8%.
Indeed, the price was actually fixed well above that at HK$90 per share for a discount of 6.8%.
Sources said HSBC and Morgan Stanley, which in addition to their role as financial advisers to the company also acted as joint bookrunners for the block trade, had lined-up orders for more than half the transaction before launch. And on top of that, they were also counting on additional buying from a number of event-driven hedge funds that were short ASM Pacific and long ASM International.
This buying did materialise and ASM Internationals’ Nasdaq-listed shares dropped 10.8% overnight as the funds unwound their previous positions. However, some of that selling could have been caused by some disappointment that the parent company didn’t take more aggressive action to boost valuation.
Aside from what was described as “massive interest” from event-driven hedge funds, the deal also attracted a broad mix of long-only investors, including existing shareholders. ASM Pacific has a long history and is the largest player globally in its sector. But despite a market capitalisation of $5 billion, it only trades about $6 million worth of shares per day and as a result, the deal was viewed by many investors as a key liquidity event.
The sale of a 12% stake should also help to improve the liquidity in the Hong Kong-listed stock.
In all, more than 100 investors participated in the transaction and, according to the source, the deal was multiple times covered when the orders books closed after about three-and-a-half hours of bookbuilding.
ASM International will still own 40% of the Hong Kong-listed unit after this transaction, and will remain the largest shareholder. Its remaining shares will be subject to a 180-day lockup. However, the press release does seem to leave the door open for further sell-downs in the future.
