Lumena raises $122 million towards acquisition payment

Lumena New Materials Corp on Monday raised most of the money needed to make up the balance of the purchase price for Sino Polymer New Materials Co, a company that was partly owned by Lumena’s chairman and which it agreed to buy in November last year. The money was raised through a HK$955.4 million ($122 million) top-up placement.

Hong Kong-listed and Sichuan-based Lumena is the world’s second largest producer of thenardite, a solid form of sodium sulphate that is an important raw material for the production of powder detergents, dyes, textiles, glass, kraft pulp and pharmaceutical products.

The company, which was previously known as Lumena Resources, had earlier said that it would pay for 90% of the Sino Polymer acquisition through the issuance of new shares to the sellers. The parties had agreed on a price of $1.5 billion for 100% of the target and with Lumena having acquired 94.1% of Sino Polymer, that left about $141 million to be settled through cash.

In a statement issued yesterday, Lumena said the net proceeds from the placement will amount to about HK$923 million ($119 million), which aside from the Sino Polymer acquisition, may also go towards capital expenditure and general working capital. Sources said the company may use existing cash resources to settle part of the acquisition cost.

Sino Polymer is a producer of various forms of polyphenylene sulphide (PPS) – a polymer that is often used as a replacement for metals, especially in hot and corrosive environments. Common uses include electrical and electronic applications, automotive and transport applications, aeronautics, environmental protection and emissions reduction applications and coatings. Essentially it is a downstream company in the same industry as Lumena, which produces one of the two key raw materials that after a de-oxidation process can be used to make PPS.

As such, the company believes the combination of Lumena and Sino Polymer will create a vertically integrated company that will result in additional growth and maximise shareholder returns. The response to the acquisition news has been somewhat mixed, however, with analysts being generally positive for the long-term as it will give the company a market leading position both in thenardite and the production of PPS and, according to some, could lead to a re-rating of the stock. However, they have also noted that there are uncertainties with regard to the integration and potential synergies. The share price has been quite volatile in the wake of the acquisition announcement, but before the placement it was trading about 7.2% above the pre-acquisition price.

“The proposed transaction represents an aggressive expansion, as the target company is slightly bigger by revenue than Lumena,” argued Moody’s analyst Jiming Zou in a note shortly after the acquisition announcement. “In addition, the benefits of any potential synergies are yet to be established, as at present Sino Polymer does not rely on Lumena for its raw material supply to any material extent.”

Moody’s has placed Lumena’s B2 ratings under review for a possible downgrade, while Standard & Poor’s, who rates Lumena and its outstanding US dollar bond issue BB-, has placed those ratings on credit watch with negative implications.

However, the uncertainty related to the funding of the cash portion of the acquisition should have been eliminated by Monday’s share placement.

The company offered 340 million shares, or a 6.7% stake in the company. The price was indicated in a range between HK$2.81 and HK$2.92, which represented a discount of 7% to 10.5% versus Monday’s closing price of HK$3.14.

According to a source, the deal saw pretty good momentum early on, supported by some investors who had met with the management during a recent non-deal roadshow and were already familiar with the company. However, some long-only accounts in Europe had to be updated on the company’s business strategy and the order books were kept open until about 7.30pm Hong Kong time to accommodate them.

In the end, though, about 80% of the demand came from Asia. The deal was fully covered with good support from tier-one long-only accounts and close to 50 institutions in the book. Other buyers included Chinese insurance companies and some hedge funds.

However, the orders were price sensitive and the final price was fixed at the bottom of the range for the maximum discount of 10.5%. This put the placement price at a 4% discount to Lumena’s pre-acquisition price of HK$2.93 and at a 10.8% discount versus the price at which Lumena issued shares to Sino Polymer’s owners to pay for the acquisition.

Despite these discounts, and even though the share price had dropped 3.1% on Monday before the placement, the stock took another hit yesterday when it fell 13.7% to HK$2.71.

Part of that may have been due to speculation that the deal had struggled, which was likely prompted by the fact that the stock was suspended from trading during the morning session. However, sources said the suspension was due to a delay in submitting the necessary documentation to the Hong Kong stock exchange.

The fully underwritten deal was arranged by BOC International and Morgan Stanley, although Bocom International, which owns a small stake in Lumena, was added as a joint placement agent after the order books were already closed.