OUE sell-down reduced by 40%, CB on hold

The controlling shareholder of Singapore-listed diversified real estate developer Overseas Union Enterprise (OUE) has sold a 9.2% stake in a company through a fully marketed share placement, which will result in an almost doubling of the free-float.

However, the seller -- a company controlled by OUE chairman Stephen Riady -- had to reduce the size of the offering by 40% to 18 million shares from a planned 30 million shares (with an option to increase the deal to as much as 52 million shares) due to insufficient demand, which was said to be at least partly a reflection of the current volatility in global stockmarkets. The latter is making investors hesitant about taking on exposure in unknown or illiquid entities. This meant the final size of the deal was capped at S$207 million ($148 million).

OUE has also chosen not to go ahead with the sale of concurrent convertible bonds that were flagged as a possibility when the share sale was launched on June 7. In a statement to the Singapore exchange, OUE said it had decided not to proceed with the CB at this stage "in light of market conditions" but said it intends to keep its financing option open and may revisit the CB sale in the future.

The scrapping of the CB means that the company itself is not getting any money from this transaction. Money that it said in the initial announcement it would use to acquire sites or properties in Singapore for development into hospitality, retail, commercial and/or residential properties. OUE said that it has recently obtained a right of first refusal from Lippo Group for such development or redevelopment sites in Singapore.

In the offering circular it also revealed that it has recently identified a property in Singapore that it is considering adding to its portfolio. The property is an office tower complex in the central business district, currently with tenants, which it believes is suitable for redevelopment. "This acquisition, if completed, would have a significant impact on our asset base," the company said, but added: "To date, although we have engaged in preliminary discussions with the seller, we have not entered into any agreements."

However, sources point out that the company has other possibilities when it comes to raising money, including bank lending. The company has a gearing of just 27% and said it has been approached by a syndicate of lenders with regard to the arrangement of a secured term loan facility. OUE said the amount of such financing "could be material", but added that "no terms have been finalised and any take-up of financing remains subject to us being able to negotiate terms which are attractive to us". The company currently has a S$599 million secured term loan facility that matures in May 2011.

One of the key points of the equity sell-down was to improve the free-float as this would make it easier for the company to issue a CB. If liquidity is too thin, it will be almost impossible to hedge a CB. Before this transaction, the company traded only 2,000-3,000 shares per day, or about $17,000-$24,000 worth, despite a market cap of about $1.7 billion. In a separate attempt to improve the liquidity, the company in May announced a five-for-one share split. The split was approved by shareholders at the annual general meeting yesterday.  

As it turned out, though, investors weren't happy with the potential dilution that a CB would bring. Once the company and its three joint bookrunners, Credit Suisse, Morgan Stanley and Standard Chartered, announced on Monday that they weren't going to go ahead with the CB, investors in the equity deal became more at ease with buying shares.

Investors also initially questioned the lack of clarity about dividends, but the company addressed this during the marketing period by committing to a payout ratio of 50%.  

While the subscription levels weren't sufficient to cover the entire offering, one source said the overall quality of the order book was good, and so it made sense to go ahead with a smaller transaction. The buyers were mostly long-only and property funds based in Asia, he said, estimating that about 80% of the deal ended up in Asia.

The shares were offered in a range between S$11.50 and S$14 and priced at the bottom, which translated into a 32% discount to re-valued net asset value (including the latest appreciations or depreciations). This compares with an average discount to RNAV of 19% for key comparables like Singapore Land, Wheelock and CapitaLand.

The final placement price was also at a 34% discount to the last closing price of S$17.50 before the placement was launched on June 7. The share price fell 8.6% during the one-week bookbuilding to S$16 and after the deal was downsized and priced on Monday this week, it dropped a further 22% to S$12.48. However, the fact that it finished well above the placement price does show that investors have confidence in the stock. Yesterday, it eased slightly to S$12.30.

The seller, Stephen Riady, who is also chairman of Indonesia-based Lippo Limited, effectively controlled 88.5% of the company through direct and indirect holdings after buying out a fellow shareholder, Barinal, in March this year. Barnial held 51.19% of OUE.

The sale will reduce Riady's stake to 79.3% and boost the free-float from 11.5% to 20.7%. 

Historically, OUB has derived almost all of its revenue from its hospitality operations and as of March 31 this year, it operated six hotels and resorts in Singapore, Malaysia and China. It has ownership interests in five of the six hotels that it operates, including complete ownership of the Mandarin Orchard Singapore. However, it has recently also diversified into the retail sector and is a partial owner of One Raffles Place, a 60-story office tower and retail podium. The adjacent 38-story Tower 2 at One Raffles Place is slated for completion in the second half of 2011. As of March 31, 2010, it had total assets of S$3.0 billion ($2.1 billion).