Private equity firm Permira has sold its remaining stake in Galaxy Entertainment Group, raising HK$6.78 billion ($875 million) and removing any further potential overhang on the stock caused by its divestment plan. The price was fixed at the bottom of the range for a 5% discount.
The deal was widely expected, just not right now.
Indeed, Permira was supposed to be locked up for another three weeks after its previous sell-down in August and the deal also hit the market at about midnight on Wednesday (Hong Kong time) when European and US markets were dropping sharply following a downward revision to the growth outlook for the eurozone and the confirmation that President Obama would get to stay in the White House for another four years.
But just like the August trade, this latest deal came on the back of a sizeable reverse inquiry, and on top of that, several of the investors who participated in the August transaction also wanted in. As a result, the bookrunner had visibility on a large portion of the order book before launch — one investor who was part of the shadow book said he had been told that close to two-thirds of the deal was covered before the books opened. This meant there was very little risk involved and the decline in overseas markets didn’t matter that much.
Given the extent of the sell-off in Europe and the US — the French and German markets both lost 2%, the UK fell 1.6% and the Dow Jones index finished 2.4% lower — one could also assume that Asian markets would follow suit yesterday (which they did).
So, waiting a day would likely have meant that Permira would have had to accept a lower price. The reason the deal didn’t launch until midnight was partly due to the fact that the Galaxy management was involved in the discussions of a sale and needed to get the documentation in place to disclose the transaction to its wider shareholder base. The order books were kept open until 8am yesterday to allow Asian investors a chance to participate as well.
The fact that the previous investors were keen to buy more shares meant that the lockup wasn’t really an issue. Although that may well have been the case anyway since the share price was trading 27% above the August issue price.
Lockups are imposed to allow the share price to recover before the seller returns to the market with another batch of shares and to ensure that the investors participating in the original deal are able to make money on their investment. Since Galaxy’s share price was up so much, the investors who participated in the August deal were said to have been entirely comfortable with an early release of the lockup.
Given that this second transaction was a clean-up trade, it may even be beneficial to the share price in the long-run to get the deal out of the way.
UBS acted as the sole bookrunner both on the August deal and this latest one, which would have facilitated the early release of the lockup.
It is perhaps too early to brand this a trend, but clearly the early lockup releases show that existing shareholders are keen to take advantage of good selling opportunities whenever they appear — be it a rally in the share price, a reverse inquiry or positive momentum in the sector.
There have been two other recent cases where the existing lock-ups have been broken early: John Swire & Sons sold its remaining direct stake in Swire Properties through a $630 million block trade in early October, more than a month before its lock-up expired; and in September, Cairn Energy sold $928 million of shares in Cairn India a few days before its original lock-up expired, allowing the seller to make the most of a recent gain in the share price.
Swire Properties’ share price was 11.6% above the previous issue price when the second deal launched and investors were generally happy to get John Swire & Sons final sale out of the way early to remove the overhang on the stock. Cairn Energy was less of an issue since the lock-up was released only a few days early, although the sale may have caught a few investors off guard before they had had time to position themselves for a trade.
Permira took advantage of a jump in Galaxy’s share price at the end of last week after data showed that gaming revenues in Macau rose 35 year-on-year in October to a monthly record of Pt26.9 billion ($3.3 billion). A week before that Galaxy itself had released strong operating results for the third quarter. The share price gained 7.6% last Friday to an all-time high of HK$29.05 and while it had fallen slightly from there, the stock was still up 101% this year when the deal hit the market.
The block comprised approximately 249.6 million shares, or 5.9% of the company. They were offered at a price between HK$27.17 and HK$27.46, which translated into a discount of 4% to 5% versus Wednesday’s close of HK$28.60.
As noted, it priced at the bottom for a 5% discount. This was wider than the 4.1% discount that Permira achieved on its $755 million sell-down in August, although that deal was sold to a small number of investors at a fixed price and without the usual wide distribution of a term sheet.
This time, the deal was offered to the broader market and, according to a source, about 40 investors participated in the transaction. However, the top-five accounts bought about 75% of the offering. The investor responsible for the reverse inquiry bought a meaningful portion of the deal, but not the majority, the source said.
The demand was split fairly evenly between long-only investors and hedge funds, but with a slight skew towards the former.
Galaxy’s share price fell 4.4% yesterday in the wake of Permira’s exit, but closed 0.7% above the placement price at HK$27.35. Hong Kong’s benchmark Hang Seng Index fell 2.4%.
Permira bought a 20% stake in Galaxy in October 2007, paying a total of $840 million, or HK$8.42 per share. At the time, this translated into a modest 6.4% discount versus the market price. Permira’s decision to take a minority stake in the Macau casino operator without any management control was called into question after a collapse in Galaxy’s share price during the financial crisis. However, the subsequent recovery of the Macau gaming industry and Galaxy’s transformation into one of the top players in the sector have silenced the critics. Including this latest trade, UK-based Permira has raised a total of $2.24 billion from its Galaxy investment, translating into a gross return of 167% in five years — and that’s before taking into account any dividends or exchange rate gains.
Galaxy was Permira’s first direct investment in Asia outside Japan, but its long history of gaming-related investments elsewhere was a significant endorsement for the Hong Kong-based company and its growth strategy in Macau, where it is competing against US casino magnates Sheldon Adelson and Stephen Wynn, as well as Macau’s own gaming tycoon, Stanley Ho.
Permira’s investment also left Galaxy with a substantially improved balance sheet and enough funds to provide a foundation for the development of Galaxy Macau, a HK$16.5 billion integrated casino resort on the Cotai Strip. Phase one of Galaxy Macau opened in May last year, while phase two, which will virtually double the size of the resort, is scheduled to be completed by mid-2015.
In connection with the release of its third quarter performance indicators two weeks ago, Galaxy said it remains “very confident” about the growth prospects for the industry and for Macau as a whole as major infrastructure projects come on stream, improving the access the former Portuguese colony. This includes the completion early next year of the last four stations on a railway line that will connect Macau to Guangzhou, which has close to 13 million people and ranks as the third largest city in China after Beijing and Shanghai.
