IBM ceased to be a shareholder in Lenovo for the second time in its history on Wednesday after executing a HK$1.17 billion ($150 million) clean-up trade.
The US computer manufacturer took advantage of improving equity sentiment to sell a 1.6% stake in the Chinese computer giant through an accelerated bookbuild led by Goldman Sachs.
However, the company still netted a loss from the trade since it first purchased the shares for $195.18 million as part of an M&A deal that closed in September 2014 according to S&P Global Market Intelligence.
Bankers will nevertheless be hoping the deal injects some much needed life into Asia’s moribund equity capital markets since it represents Hong Kong’s first public secondary share trade of the year.
Bankers said the issue went well in primary syndication, with strong demand encouraging tight pricing. This was fixed at HK$6.42 per share, the tightest end of a HK$6.26 to HK$6.42 range and a 4% discount to the stock’s HK$6.69 close.
The 182 million share offering was very small relative to Lenovo’s average daily volume and accounted for only three days trading. Bankers said it was well received because the stock has built up a significant short position since the beginning of the year. Of 80 accounts, which participated, they said most were hedge funds using the deal to cover their short positions.
Lenovo’s short selling ratio peaked at 50.776% on Friday and stood at 20.635% on Monday, equating to 0.475% of the Hong Kong market. The stock itself rose 1.83% on the day, underperforming the blue chip Hong Kong Index, which jumped 3.07% to close above the 20,000-level for the first time in nearly two months.
In turn, Hong Kong was unable to eclipse Shanghai and Shenzhen, which rose 4.26% and 4.7% respectively.
At HK$6.69, Lenovo is trading at about 8.7 times forecast 2017 earnings, almost at its trough valuation on a three-year basis and well below its 13.7 times average.
In a recent research note Credit Suisse recommended accumulating on signs of weakness. It believes 11 times forecast 2017 earnings is a reasonable valuation given Lenovo’s 2017 growth expectations, which are “largely driven by PC/server share gains, plus synergies and cost savings from restructuring ($1.35 billion between December 2015 and December 2016).”
The company announced better-than-expected results for the third quarter ended December last year, with net profit rising 18.6% year-on-year to $300 million. But that was not sufficient to overturn a loss accumulated during the first half of the financial year.
In the first nine months through to December the group reported a $308 million loss compared to a net profit of $729 million the previous year. In its quarterly report, the company attributed this to falling PC and notebook sales and slower growth in the smartphone business.
As a result, some banks including Goldman Sachs, Citigroup and Bank of America Merrill Lynch have reduced their target prices for Lenovo.
For example, Goldman Sachs has a target price of HK$6.5, lower than the stock’s latest close and only a slight premium to IBM’s divestment price.
Second breakup
Wednesday’s sale ends an 11-year relationship between IBM and Lenovo. The two first tied up in 2005 when the Chinese IT company purchased IBM’s PC business for $1.25 billion excluding debt. Lenovo settled the acquisition through a combination of cash and the issuance of 1.74 billion new shares.
These shares were sold through six separate block trades between 2008 and 2011, with the final one taking place in February 2011. This enabled IBM to raise $263 million, putting an end a six-year relationship with the Chinese PC giant.
Three years later, however, and the two companies were reconnected when Lenovo agreed to purchase IBM’s x86 server operations in January 2014. According to S&P Global Market Intelligence, the deal closed on September 29 that year for a purchase price consideration of $2.04 billion of which $1.847 billion was paid in cash and $195.18 in stock.
This means, IBM has booked a loss of about $45 million from the new share sale since Lenovo was trading around the HK$11.46 level when the deal closed in September 2014.
