Two more Philippine deals draw strong demand

The demand for equity from the Philippines is showing no signs of slowing down with two more companies completing the international portions of their first ever share sales on Friday and Saturday, which makes them set to raise a combined $635 million.

Vista Land and Lifescapes, the country’s largest residential home builder, will pocket most of that with its base deal size of Ps21.28 billion ($465 million). The offer, which is technically a follow-on since the company listed through an introduction last month, will be the second largest equity deal in the Philippines, surpassing the $445 million raised by Alliance Global Group in June.

Vista’s offering also has a 15% greenshoe that may lift the total deal size to Ps24.5 billion ($535 billion), but in local currency terms it still won’t exceed SM Investment’s Ps28.75 billion IPO in March 2005 ($528 million at then exchange rates).

Meanwhile, the country’s largest free-to-air broadcasting company, GMA Networks, will raise $170 million from its initial public offering after fixing the price at the top of the offering range at Ps8.50. If the 15% greenshoe is exercised, the deal could increase to $195 million.

Both companies sold 70% of their total deals to international investors, while the remaining 30% will be offered to domestic investors in separate sales that will take place this week. UBS is the sole global coordinator and bookrunner for the Vista deal, with BDO Capital & Investment Corporation acting as lead underwriter for the domestic offering. The GMA offering is arranged by Deutsche Bank as the global coordinator and bookrunner and ATR Kim Eng Capital Partners as joint lead manager.

Both deals attracted strong demand, but GMA was particularly noteworthy with an order amount of $3.6 billion at the final price, according to a source familiar with the situation. This translates into a subscription ratio of 18.5 times of the total IPO size including the greenshoe, or 25 times if counting only the international tranche. More than 150 international investors participated.

The book included all the biggest long-only names and major hedge funds, according to sources. About 25% of the demand came from the US, while Europe generating slightly more interest than Asia.

Vista saw $2 billion of demand from 115 international accounts for the portion of the deal left after taking out the cornerstone tranche, according to a separate source. The developer set aside $300 million for 11 cornerstone investors, including the Dubai Investment Group, which bought $85 million worth of shares that will give it a 7% stake of the company. The investment is interesting as it shows Middle Eastern investors are expanding into new markets as they search for suitable investment objects in Asia.

A geographical breakdown showed 42% of the demand came from the US, 25% from Asia, 21% from Europe, 8% from the Middle East and 3% from Australia. In terms of types of investors the interest was split 60-40 between long-only and hedge funds.

Both Vista and GMA offered exposure to the economic growth in the Philippines, which is currently expanding at an annual pace of more than 6%. GMA is also a strong proxy to the consumption story, which should get an extra boost after the Central Bank decided to cut interest rates on Friday. Both companies are leaders in their respective industries.

However, with the secondary market in the Philippines being a solid performer so far this year with a 26% gain, investors are becoming less selective in terms of what stocks to buy. And companies have been quick to catch on. Since the beginning of June alone, five Filipino companies have raised a combined $1.7 billion from equity offerings and all of them have met with strong, or at least solid, demand.

Next in line is Philippine National Bank, which launched a follow-on offering at the end of last week that could raise about $200 million based on current share prices. The final price will be fixed tomorrow (July 17).

According to some observers, the strong demand has resulted in a shrinking valuation gap between the market leaders and other less well-positioned companies in the same sector that may not have the earnings growth to back up the higher multiples. So, while the Philippines after years of underperformance is finally seeing some real foreign money flow into its stock market, there are emerging concerns that part of the market is beginning to look overvalued.

“I think the (market) leaders are fairly valued, but the valuation gap is getting too thin,” says one observer, who notes that the current situation in the Philippines is similar to that in 1996 with good fundamentals, political stability and a demand that exceeded the available supply of equities.

The large number of re-IPOs over the past 18 months in particular has helped boost supply by increasing the free-float at some of the country’s blue-chip companies, which has resulted in a significant rise in daily trading volumes. But Manila is still small compared with most of the other established Asian markets and as previously underweight international investors are trying to increase their exposure, it is almost inevitable that some share prices end up being a bit inflated.

GMA came to market at a discount to its only listed domestic comparable, ABS-CBN Broadcasting Corporation, which trades at about 23 times this year’s earnings and its regional comps, which are quoted at an average price-to-earnings ratio of approximately 20 times. At the IPO price, GMA is valued at a 2007 PE multiple of 16.4. However, this is still at a slight premium to the Philippine market average at about 15 times this year’s earnings.

Aside from the common macro-economic backdrop, investors also like GMA because it is in a prime position to benefit as amount of money that goes into advertising (known as adspend) continues to increase. According to data complied domestically, the broadcaster was responsible for all of the top 10 regular TV programs in 2006 and 19 of the 30 top programs. Its financials have also improved, with Ebitda and net income seeing expanding at compound annual growth rates of 14% and 17% respectively between 2004 and 2006.

GMA, which is controlled by the Gozon and Jimenez families, is also known for its management track record both with regard to innovation and efficiency and it operates in an industry with very high barriers to entry.

The company, which has been planning an IPO for the past couple of years, offered a total of 913.461 million shares, although only 10% of those were sold in the form of common shares. The rest was offered in the form of Philippine Depositary Receipts which have no voting rights in order to get around a ban on foreign ownership of broadcasting companies. Each PDR accounts for one common share and
the price for on the common shares and the PDRs was the same.

Including the greenshoe, the total deal size accounts for about 22% of the company and will see the controlling shareholders’ economic interest fall to 77.2%. They will still hold 98.5% of the voting rights, however. Of the total deal, only 20% was backed by primary shares, while 80% was sold by existing shareholders.

The initial price range was set at Ps7 to Ps 8.50. GMA is due to start trading on July 30.

Vista offered 3.11 billion shares plus the 15% greenshoe. Of the total amount of shares, 59% were primary. The shares were offered in a range between Ps6 and Ps7.

The company was recently set up to bring together the residential developments and land banks controlled by Senator Manuel Villar, but the entities are no newcomers to the market. In fact they have developed more than 72,000 homes since 1988, giving the company a 47% share of the homebuilding market. In its current shape Vista will focus on low-, middle- and high-end housing both in Manila and in the rest of the country.

Its diversity across income segments and its nationwide footprint were key selling points, according to the source, as was its strong brand names and large, high quality land bank.