M&L Hospitality Trusts (M&L Trusts) told investors on Friday that it has decided not to proceed with its initial public offering in Singapore due to disappointing demand. The trust was set to own six hotels in Singapore, Australia and Japan at the time of listing and was looking to raise between S$425.8 million and S$463 million ($339 million to $369 million), which would have made it the largest IPO in Singapore in almost a year.
In a brief statement, the company said that “the targeted book coverage outcome has not been achieved” but didn’t elaborate further. The family behind the trust will now explore other options for its hotel assets, sources said.
The key issue, according to sources, was that the management wasn’t happy with the quality of the demand, or as one source put it: it wasn’t comfortable with the shape and colour of the order book. As a real estate investment trust (Reit), a big portion of the future growth will come from subsequent asset injections and to fund those, M&L Trusts will need the support of existing shareholders. “Demand isn’t just about a number,” the source noted. “It is important to get off on the right foot with a high-quality list of unitholders to begin with.”
The institutional portion of the offering, which closed on Thursday last week after almost two weeks of bookbuilding, is said to have attracted some Dutch property funds. But many other investors had difficulties getting their head around the fact that M&L Trusts will own assets in three different markets. For one, that can make it difficult to fit the trust into an appropriate portfolio or fund.
More importantly, it also increases the level of risk as investors need to include the foreign exchange element in their modelling of prospective earnings. On top of that, hotel Reits are still not that common. In Singapore there is still only one pure hotel Reit at the moment — CDL Hospitality Trusts, which listed in 2006 and currently owns five hotels in Singapore, five in Australia and one in New Zealand. CDL’s share price has gained 125% since listing as it has expanded its portfolio of assets.
Investors may also have been a bit wary about the fact that M&L Trusts hadn’t secured any cornerstone investors before launch. The lack of such support would have suggested that the big funds weren’t too fussed about securing a guaranteed allocation — at least not at the price on offer.
M&L Trusts was aiming to sell approximately 532.2 million units, or 55% of its total share capital, at a price between S$0.80 and S$0.87 per unit. Based on the company’s projected earnings, this implied a dividend yield of 4.7% to 8.0% for 2012 and 7.7% to 8.3% for 2013.
The deal also came with a 10% greenshoe that could have increased the total proceeds to as much as $406 million at the top of the range, if exercised in full. However, a source said most of the demand came at the bottom of the price range.
M&L Trusts is structured as a stapled security that comprises one unit in M&L Hospitality Reit and one unit in M&L Hospitality Business Trust. The two trusts were to be traded together as one entity and the business trust would have been dormant at the time of listing.
The trust is sponsored by Grandline International, which is owned by the Singapore-based Kum family, which was previously involved in the Singapore shipping industry, particularly the chartering of offshore support vessels and barges to companies in the oil and gas industry in the Middle East and Southeast Asia. Michael Kum was to be chairman of M&L Trusts as well as of the M&L Reit management company, which is wholly owned by M&L Trusts. His daughter, Jocelyn Kum was to become CEO of both vehicles.
DBS, J.P. Morgan and UBS were joint bookrunners for the IPO.
The cancellation of the deal sends a poor signal to other IPOs in the Singapore pipeline — although perhaps the key takeaway is that investors remain selective and are holding on to their cash until they find a stock that they really like. In the meantime, they prefer to invest in companies that are already listed, well-established and have a proven track record.
Bumitama Agri, which is the only company of size to have listed in Singapore this year so far, attracted strong demand for its IPO, however, and has also traded well in the secondary market. The crude palm oil producer, which has all of its businesses in Indonesia, raised $221.7 million ($177 million) after fixing the price at the top of the range and jumped 31.5% in its April 12 debut to S$0.98. It has come back slightly since then, but last Friday’s close of S$0.90 is still 21% above the IPO price of S$0.745.
Among the larger companies in the IPO pipeline is Formula One, which is working towards a listing in June or early July and may raise as much as $2 billion to $3 billion, according to sources. And India’s Reliance Communications said earlier this month that it is evaluating a potential sale of its submarine cable unit, Flag Telecom, through a Singapore-listed business trust. Reliance may sell up to 75% of the unit, which implies a deal size of more than $1 billion, according to sources.
