The Indian IT services company raised $256 million pre-greenshoe after New York's close Wednesday following the successful conversion of 2.605 million shares into 5.21 million ADRs. There is a ratio of two ADRs per share.
No new money was raised from the unique sale, which represents a first for India, where previously companies have been unable to convert common stock into ADRs. While there is full fungibility of ADRs into common stock, companies have only recently been allowed to convert the other way and only if an offering is open to all shareholders.
Under the lead management of Citigroup, Goldman Sachs and Merrill Lynch, Infosys sought to set new standard and other Indian companies now seem likely to follow in quick succession. If the greenshoe is exercised bringing the deal size up to six million ADRs, Infosys will have also raise the maximum it filed with the SEC.
At $49 per ADR, the company priced its deal at a 27% premium to the stock's underlying close and at a 3.7% discount to the ADR's last sale of $50.91. Unsurprisingly, short selling pressure meant the ADR premium contracted significantly in the run-up to pricing.
Having averaged 52.6% in the 12 months preceding the sale, the premium was hovering around the 48% level as pre-marketing began in mid-July. Two days before pricing, it was still at 44.4%, dropping to 40.2% one day before pricing and to 31.7% on the actual day.
Nevertheless, selling shareholders managed to realise a significant price premium from the sale of their local shares, while the new ADR holders are also likely to happy since the premium will almost certainly bounce straight back and indeed the ADR was trading up at $51.91 after New York's open on Thursday.
According to the company's SEC filing, shareholders holding more than 1% of the company's equity accounted for roughly 66% of shares sold into the offering. The deal was structured such that domestic investors were allocated pro rata to the number of shares they submitted and overall supply into the offering.
As a result of the deal, the filing says that Narayana Murthy, the company's largest single shareholder, will see his stake drop from 7.2% to 6.8% pre-greenshoe. Including Murthy, the company's 16 directors as a group sold 802,538 shares pre-greenshoe and will see their combined stake drop from 23.9% to 22.8%
Institutional investors as a group will drop from 27.6% to 26.2% following the sale of 932,809 shares pre-greenshoe. This group is led by Emerging Markets Growth Fund, which will see its stake drop from 5.6% to 5.3%. The other selling shareholders with stakes above 1% comprise: Merrill Lynch, Morgan Stanley, Citigroup, Jamuna Raghavan, Capital International, UBS Warburg, Oppenheimer, N Sriram, Copthall, N Anand and NS Raghavan.
The deal was a tricky one for the leads because it meant building a book from both the supply and demand side. On the supply side, observers say the domestic order book closed five times covered and report a total of 8,000 selling shareholders.
On the demand side, the ADR order book is said to have driven by early momentum from retail and middle market funds, with a late surge from the large institutions, which resulted in a jump from one times covered to three times covered over the course of the final day.
Co-leads were Deutsche Bank and UBS.
Two of the main aims of the deal were to expand the ADR freefloat and broaden the stock's reach among US tech funds. The company appears to have achieved both. The new deal represents 4.5% of issued share capital and will effectively double a freefloat that stood at 5% pre deal.
Where the investor base is concerned, observers say that two thirds of the institutional order book comprised new accounts and that two thirds were top tier global accounts, including a smattering of accounts normally only interested in TSMC from Asia. About 75% of the overall book derived from the US, with a further 15% from Europe and 10% from Asia. Of the US demand, about 20% was from retail investors.
In terms of valuation, the ADR is trading on a p/e ratio of about 29 times 2003 earnings. This places it at a significant premium to US based IT service companies, which trade in the high teens. However, at 31.8%, the company enjoys EBITDA margins twice that of companies like Accenture and believes that it will be able to withstand margin pressure because of overall volume growth.
