Rakuten sells 20.3% stake in Ctrip

JapanÆs largest online retailer, Rakuten, sold its 20.3% stake in Ctrip.com International, China's leading online travel agent, at a 2.56% discount to the stock's last traded price. Rakuten netted $505 million for the shares it has held since 2004.

Investors had Ctrip's traded price on the Nasdaq as ready reference so the seller conducted a three-day marketing exercise without an indicative price range. Investors placed orders either with or without price sensitivity.

Ctrip closed trading on August 9 at $39 and the book was fully covered, with price sensitivity, in the $38-$40 range. The company thus comfortably priced the deal at $38, according to a source. The price of $38 per American depositary shares (ADS) represents a 2.56% discount to Ctrip's August 9 Nasdaq close. (Two ADSs represent 1 ordinary share of Ctrip.)

Around 50 accounts placed orders. As marketing efforts focused on the United States, the majority of demand was from this geography. Asian investors accounted for around 25% of demand and only a few accounts from Europe participated. Long-only investors took around 60% of the deal.

"In Asia every investor meeting resulted in an order, reinforcing that buy-in into the Ctrip growth story is high in the region," says a source close to the deal. "On an overall basis, the conversion rate was about 50%."

Ctrip announced strong second quarter results on August 6, with net income growing to RMB88 million ($12 million), a 51% increase over the same period last year and a 33% increase from the previous quarter. The increase was mainly due to higher income from operations. Revenues also increased 52% year-on-year and 24% from the previous quarter.

ôOn the back of its healthy second quarter results, long-only investors expressed bullishness on Ctrip and came into the book,ö says an observer.

Ctrip was founded in 1999, then in 2003 raised $44.5 million via an IPO priced at $9 per share. After a burst of enthusiasm with investors pushing the price up to a peak of $21.50, shares settled at around $12 in early 2004.

Rakuten bought its Ctrip stake in mid-2004 for $109 million. The Japanese firm bought existing shares from Ctrip shareholders in a negotiated sale, paying $16.50 per share, a premium to the then prevailing share price. This was RakutenÆs first substantial overseas investment and resulted in Rakuten becoming CtripÆs largest shareholder. With the investment Rakuten got the right to appoint a director to CtripÆs board.

Rakuten owns a diversified range of businesses and investments in Japan. Rakuten Travel, a 100% subsidiary of Rakuten, operates Japan's largest online hotel reservation website. When Rakuten invested in Ctrip, analysts speculated that Rakuten intended to participate in growth in the China travel market via the investee company. But subsequently, Rakuten Travel set up a Shanghai branch and started to establish its own brand in China.

In connection with the sale of the Ctrip stake, a Rakuten spokesperson told media Rakuten was confident of servicing the China market directly. Research analysts have also commented that Rakuten needs cash to invest in its other businesses as well as repay some debts.

Analysts expect CtripÆs business to benefit from the 2008 Beijing Olympics. The United Nations World Tourism Organisation expects China to overtake the US to become the world's third most popular tourism destination next year and notes that the number of overseas travellers to China has increased from 10.5 million in 1996 to 49 million in 2006. The Olympics are expected to have a spill-over effect on tourism to other cities in China and beyond 2008 and Ctrip is well placed to benefit from these developments.

Some analysts have expressed surprise at the timing of the Rakuten exit, given the bright future prospects of Ctrip. But RakutenÆs China business could also be logically expected to benefit from increased traffic due to the Olympics and it is possible they chose to sell the Ctrip stake to avoid any potential conflicts of interest which could arise. Rakuten announced the stake sale in advance of the recent subprime meltdown in US markets and has maintained that it wants to free cash for alternative investment plans.

A combination of market nervousness and increased liquidity in the stock saw the share price of Ctrip dropped 3.8% following the placement, to close at $37.51 on August 10.

Whatever be the underlying reason for the sale, the more than four-fold return on investment which Rakuten has earned, the $505 million it now has in its coffers, and its well-timed and executed selldown are cause for celebration for the Japanese company. And for lead manager to the sale, Morgan Stanley, and co-manager Citi.