The Thai unit of UK supermarket chain Tesco has set the terms for the initial public offering of a property fund that will include 17 malls anchored by Tesco Lotus stores. The management will start to meet domestic investors today and an international roadshow will follow next week.
The fund, which is named Tesco Lotus Retail Growth Freehold and Leasehold Property Fund, will aim to raise between Bt12.8 billion and Bt13.8 billion ($410 million to $442 million) by selling 75% of its 1.77 billion units to public investors. One-third of that will be targeted at international accounts, one-third to domestic institutions and one-third to Thai retail investors. All the units are new.
The remaining 25% will be sold to Ek-Chai Distribution System, a company that is controlled by Tesco in the UK. This means the total funds raised by Tesco Lotus will be between Bt17.1 billion and Bt18.4 billion ($545 million to $588 million) – money that the fund will use to pay for the properties that will be injected into its portfolio by the parent company.
Even when excluding the 25% of the offer that will go to the parent company, the deal will be the largest IPO in Thailand since Rayong Refinery raised $719 million in May 2006, according to Dealogic. It will also be the first IPO in Thailand marketed to international investors since Indorama Ventures’ $142 million listing in January 2010 and hence should attract some attention because of its scarcity value.
The fund will offer 1.33 billion units to public investors at a price between Bt9.65 and Bt10.40. Based on the expected earnings for the fiscal year to February 2013, this will imply a forward yield of 6.5% to 7%, according to sources. Thai property funds are similar to real estate investment trusts (Reits) and Thai Lotus is expected to pay virtually all of its distributable income as dividends.
By comparison, Singapore’s largest retail Reit, CapitaMall Trust, trades at a 2012 yield of 5.7%. Other Thai property funds are typically very small and thinly traded and can’t really be viewed as comparables, sources say.
According to sources, Capital Group has agreed to support the offering as a cornerstone investor. The exact amount that it will invest hasn’t been made public yet, but is expected to account for about 10% of the portion sold to public investors – or about 25% to 30% of the international tranche.
The fund will include two more malls than the 15 it mentioned when the IPO was first announced in September last year, but this will still only make up a minor portion of Tesco’s property portfolio in Thailand. According to information provided by Ek-Chai at a press conference in Bangkok yesterday, the company operates more than 900 stores in the country, of which 133 are hypermarkets.
This ready-made pipeline of properties that can be injected into the fund later should be positive for investors as it implies significant growth potential in addition to the yield provided by the rental income from the existing malls. Reporters attending the press conference were told that the parent company plans to inject an additional two assets into the property fund before the end of 2013 fiscal year and to add at least one to two assets to the fund every year after that.
The initial properties are located in Bangkok, provincial capitals and popular tourist areas.
Sources familiar with the offering say the listing of the property fund is partly driven by Tesco’s desire to become a true local brand. The company, which is the past has been criticised for its rapid expansion, is already involved in a lot of community-related activities in Thailand and through the fund the Thai public will now be able to participate in the growth of its retail business as well. Of course, the listing also gives Tesco an opportunity to monetise some of its property assets.
The timing of the launch may be somewhat unfortunate, however, as fresh data out yesterday showed that Thailand’s GDP fell by a greater-than-expected 9% year-on-year in the fourth quarter. This left the GDP growth for 2011 at a mere 0.1%, compared with forecasts of 1% or above.
The weakness was mainly attributed to flood-related disruptions in production and supply chain issues and the sharpest decline came in net exports. However, domestic demand and consumption was also weak. While activity is expected to normalise this year analysts don’t expect a major recovery until the second or third quarters as the government-led reconstruction and spending starts to trickle through the economy.
In November, Big C Supercenter was forced to postpone a planned $810 million rights issue because the flooding prevented some shareholders from attending an extraordinary general meeting to approve the deal. The company, which is majority-owned by French food retailer Groupe Casino and operates hypermarkets, convenience stores and health, beauty and pharmacy stores throughout Thailand, has yet to reschedule the EGM and resume the offering.
Tesco Lotus will open the order books for domestic investors on Friday and for international investors next Monday. The final price is expected to be fixed on March 5 and the listing is scheduled for March 19.
Bank of America Merrill Lynch, Nomura, Phatra Securities and Royal Bank of Scotland are joint bookrunners.
