Temasek's sale of Fortescue stake triggers sell-off

Temasek Holdings’ sale of its A$876.5 million ($879 million) stake in Australian iron ore producer Fortescue Metals Group triggered a sell-off in the open market yesterday as investors tried to digest why the tight-lipped Singaporean investment company would want to cash in. The sale was completed through a Morgan Stanley-led block trade after the market closed on Wednesday.

While it wasn’t clear when Temasek made its investment, as the stake wasn’t large enough to trigger a public disclosure filing, Fortescue’s share price has doubled from a low of A$3.44 in May last year and closed at a 52-week high of A$7.27 on Tuesday this week. Hence, the sale may have been nothing more than a normal portfolio reshuffle and capital management exercise. However, Temasek carry a lot of weight as a shareholder and investors are always trying to second-guess its intentions.

Australia also doesn’t see that many pure sell-downs, which may partly explain the negative reaction.

Fortescue’s share price fell 7.8% to A$6.63 on Thursday – well below the placement price of A$6.80. The broader market also dropped during the day, but only by 1.05%.

The placement itself attracted a lot of interest, however, with more than 100 investors participating in the transaction. Momentum was strong immediately at launch and the deal was covered within one hour. When the books closed after about three hours, it was said to have been multiple times subscribed. In addition to the sharp run-up in the share price, Fortescue has been the subject of M&A speculation recently and, following news of strong second quarter shipments earlier this week, the stock had also been upgraded by a number of research analysts.

Temasek sold all of its 128.9 million shares, which was equal to a 4.1% stake in the company or about 12 days’ worth of trading volumes. The shares were offered at a price between A$6.76 and A$6.88, which translated into a 4.3% to 6.0% discount versus Wednesday’s close of A$7.19. The final price was fixed at A$6.80 for a 5.4% discount.

About 40% of the demand came from Australia and included top-quality long-only names as well as resources-focused hedge funds. The rest of the orders came primarily from Asia.

Also in the market on Wednesday evening was a couple of smaller placements. Singapore-listed crude palm oil producer First Resource and its controlling shareholder raised S$133.2 million ($104 million) from a combined sale of secondary shares and treasury shares. And in Hong Kong, China Wireless Technologies pocketed HK$682.5 million ($88 million) before expenses from a top-up placement.

A primary reason for the First Resources sale, which was arranged by Citi, was to help improve the liquidity in the stock. The company had met with investors at a number of recent conferences and the overriding complaint had been that the liquidity was too low. To address this and give investors an opportunity to start accumulating shares in the company, 83% of the deal was made up of secondary shares that were sold by controlling shareholder Eight Capital. Its shareholding will fall to 68.2% from 74% as a result of the sale and the free-float will increase to 25% from 19%.

The remaining 17% of the deal was made up of treasury shares, allowing the company to raise some fresh capital from the transaction.

In total, the deal comprised 90 million shares, or a 6.2% stake in the company. They were offered in a range between S$1.48 and S$1.55, or at a 3.7% to 8.1% discount versus Wednesday’s closing price of S$1.61. Given that the deal was timed to take advantage of a strong share price performance in the past eight months – the stock had gained 73% since May and closed at a 52-week high on the day of the transaction – it was perhaps not too surprising that the price was fixed at the bottom for the maximum 8.1% discount.  

According to a source, the deal was covered in 1.5 hours, even with several other placements in the market at the same time. More than 40 investors participated and the company’s effort to broaden its shareholder base was rewarded as about 93% of the demand came from new investors. The buyers included both long-only accounts and hedge funds.

Meanwhile, China Wireless, a China-based provider of wireless solutions and equipment, including smart phones, offered 100 million shares with an option to upsize at a price between HK$4.49 and HK$4.68. The price range translated into a discount of 4.1% to 8% versus Wednesday’s close of HK$4.88. UBS acted as the sole bookrunner.

The deal was launched on the back of a 10.2% bounce in the share price earlier in the day, so it was no great surprise that the offering was priced towards the low end of the range. However, the fact that the bookrunner was able to move the final price inside the range at all was testament to the strong interest in the stock from long-only fundamental investors.

The offering was also upsized by 50% to 150 million shares, which increased the deal size to 7.14% of the existing share capital. The price was fixed at HK$4.55 for a 6.8% discount.

As with most other follow-on share sales in Hong Kong, this one was done through a top-up placement that saw the controlling shareholder, Data Dreamland, first sell secondary shares in the market and then subscribe to the same number of new shares at the same price from the company. As a result of the transaction, Data Dreamland’s stake in the China Wireless will fall to 36.9% from 39.5%.

The company said in a statement that it had no specific plans for the money raised except as general working capital. However, it noted that the share sale will also have other benefits such as the introduction of new investors to the company, an increase of the free-float and, as a direct result of that, improved liquidity in the stock.