IBM sells remaining shares in Lenovo

Six years after Lenovo Group acquired IBM’s PC business, the US information technology giant has offloaded the last of the Lenovo shares that it received as part-payment. The sale took place after the Hong Kong market closed on Friday and enabled IBM to raise HK$2.05 billion ($263 million).

This was the sixth sale of Lenovo shares by IBM through the capital markets and the first since July 2008 when it sold $77 million worth of shares that brought its stake below the 5% disclosure threshold. This meant it no longer had to tell the market when it sold shares and many investors probably assumed that it had divested its remaining stake in the open market already. However, the company may have waited since Lenovo’s Hong Kong-listed shares took a tumble shortly after the previous sale with the onset of the financial crisis and, while the share price has recovered since, it hasn’t traded meaningfully above the previous selling price of HK$5.19 for any length of time.

And even though the stock is still trading below that level – indeed, it is below the price fetched at the previous three sell-downs by the US firm – it is still well above the HK$2.67 price at which IBM received the shares back in 2005. IBM was left with a 15% stake in Lenovo following the sale of its PC business.

A sharp turnaround from a recent low of HK$4.44 on February 10 (following a two-month decline) also seems to have encouraged IBM to sell the rest of its shares in one go – through yet another capital markets trade – rather than to dribble them out little by little in the open market. According to Hong Kong stock exchange data, IBM hasn’t sold any shares in Lenovo since July 2008.

IBM offered 435.716 million shares, or 4.3% of the outstanding share capital, at a price between HK$4.68 and HK$4.71. This translated into a discount between 3.5% and 4.1% versus Friday’s closing price of HK$4.88. According to a source, the deal was heavily oversubscribed and covered throughout the range after a few hours of bookbuilding, but the price was fixed off the top at HK$4.70 to leave some money on the table for investors. This resulted in a final discount of 3.7%.

The demand included chunky orders from both existing shareholders and other long-only accounts and the quality of the order book was said to be high.

Investors may have been attracted to the deal partly because it confirmed there will be no more sales by IMB in the stock. In mid-November, TPG Newbridge Asia (an Asian affiliate of TPG) and General Atlantic, which teamed up to buy into Lenovo in 2005 to help strengthen the Chinese firm’s financial position at the time of the IBM acquisition, also sold their remaining shares in the Chinese computer maker through a $198 million deal. That trade, which was the fourth by the three private equity firms (although all three firms didn’t participate in every transaction), was completed at a price of HK$5.451, or a 1.4% discount to the latest market price.

The IBM sell-down came after Lenovo said on Thursday that its net profit for the nine-months to December almost doubled to $231 million from $116 million in the same period a year earlier and after it agreed in late January to combine its PC business in Japan with that of NEC Corp. Lenovo will have a 51% stake in the JV at the outset, but over time it is expected to take full control. Lenovo will pay NEC $175 million through the issue of new shares plus an additional $50 million if certain financial milestones are reached. The agreement also includes options for NEC to sell its remaining stake in what is currently Japan’s largest PC business to the JV and for Lenovo to buy the same stake at a maximum cost of $275 million in cash after five years. The JV will catapult Lenovo to the number one position in Japan's PC market from seventh previously.

In the earnings report, which also showed a $99.7 million net profit for the October to December period that was in line with analysts’ forecasts but deemed strong nevertheless, Lenovo acknowledged that growth in the worldwide PC market continued to moderate and that “certain challenges in the global economy and debt crisis in the mature markets remain”. However, the company said it remains “cautiously optimistic” about the market outlook and is confident that it will continue to outperform the worldwide PC market, as it has done for the past seven consecutive quarters. In the nine months to December, its market share of the global PC market increased by 1.5 percentage points to 10.2%.

Analysts are generally positive on Lenovo with 20 “buy” recommendations on the stock, compared with six “holds” and just four “sells”.

The share price fell 0.8% on Friday, but had risen 10.8% in the previous five days, which may have made IBM confident that buyers were returning to the stock.

The Friday sale was arranged by Citi, which has been the sole bookrunner for all of IBM’s six sell-downs – a rare feat these days when banks are getting increasingly aggressive about winning block trades and are routinely approaching investors that are expected to sell following the expiry of lockups or for other reasons that are publicly known.

Blocks and follow-ons have been the key primary market activity in Hong Kong so far this year as initial public offerings have been slow to take off. However, aside from the $1.79 billion sell-down by Carlyle in China Pacific Insurance (Group) Co on January 7, most of the deals have been fairly small. In fact, according to Dealogic, the Lenovo deal is the second largest block or follow-on in Hong Kong year-to-date, ahead of the $170 million sell-down by General Atlantic in Chinese car retailer Zhongsheng Group Holdings.