Tesco Lotus raises $450 million from public investors

The Thai unit of UK supermarket chain Tesco has raised a total of Bt18.4 billion ($602 million) from the initial public offering of a property fund comprising 17 malls anchored by Tesco Lotus stores. However, 25%, of the deal was bought by Tesco-controlled Ek-Chai Distribution System, suggesting the property fund really only raised 75%, or Bt13.8 billion ($450 million) from public investors.

The deal was priced at the top end of the range at Bt10.40 per share, giving an implied yield of 6.5% for the fiscal year to February 2013. Thai property funds are similar to real estate investment trusts (Reits) and the Tesco fund, which goes by the somewhat cumbersome name of Tesco Lotus Retail Growth Freehold and Leasehold Property Fund, is expected to pay almost all of its distributable income as dividends.

The fund offered a total of 1.77 billion new units at a price between Bt9.65 and Bt10.40 apiece. Of that, 1.33 billion units went to public investors, while Ek-Chai bought 442.5 million units.

Of the public offering portion, 382.65 million units, or about 29%, went to international accounts, while 944.85 million units, or 71%, went to Thai retail and institutional investors, according to sources. Initially, one-third of the offering was targeted at international accounts, one-third to domestic institutions and one-third to Thai retail investors.

Capital Group came in as a cornerstone investor and bought 110 million units, which translates into an investment of about $37 million at the final price. It also accounts for about 8% of the portion sold to public investors, or 29% of the international tranche.

The fund will use the proceeds to pay for the properties that will be injected into its portfolio by the parent company. According to information provided by Ek-Chai at a press conference in Bangkok last month, Tesco Lotus operates more than 900 stores in Thailand, of which 133 are hypermarkets.

The final yield compared favourably to Singapore’s largest retail Reit, CapitaMall Trust, which trades at a 2012 yield of about 5.7%. Other Thai property funds are typically very small and thinly traded, and can’t really be viewed as comparables, sources said.

The fact that Tesco Lotus is part of a big UK retailer played an important role for attracting investors and the deal saw strong demand across all three tranches, one source said. However, it also helped that Tesco Lotus has a big market share in Thailand and that it is “pretty much a household name”, the person added.

Excluding the cornerstone tranche, the international portion was 15 times covered and attracted more than 50 investors from Europe and Asia. The buyers included both long-only and hedge fund investors, sources said. The retail portion was also oversubscribed.

At $450 million, the deal is the largest IPO in Thailand since Rayong Refinery raised $719 million in May 2006, according to Dealogic. It was also the first IPO in Thailand marketed to international investors since Indorama Ventures’ $142 million listing in January 2010.

The IPO comes as Thailand struggles to recover from last year’s floods, which hit the country’s exports as well as domestic demand and consumption. The economy grew just 0.1% during 2011, compared with forecasts of 1% or more. Still, after falling 0.7% last year, the Stock Exchange of Thailand SET Index is up about 13% so far this year.

According to the International Monetary Fund (IMF), Thailand’s economy is poised to make a strong rebound in 2012, which may have helped convince investors to participate in the offering.

“The accommodative monetary policy of the Bank of Thailand and a package of fiscal stimulus measures by the government are an appropriate macroeconomic response to these circumstances,” the IMF wrote in a report last month. “The determination to shift income distribution, rebalance growth towards domestic consumption, and invest in flood-prevention, comes at an opportune time to help offset weak world demand.”

Bank of America Merrill Lynch, Nomura, Phatra Securities and Royal Bank of Scotland were joint bookrunners for the IPO. The stock will start trading on March 19.

Although Tesco Lotus’s offering attracted solid demand, the volatile conditions in global markets has been keeping the performance of other newly listed stocks in check.

Sunshine Oilsands, a Canadian oil producer that raised $580 million from a Hong Kong IPO last month, has seen its share price slide since it started trading on March 1. Yesterday it closed at HK$4.63, down 4.7% from the IPO price of HK$4.86.