In public hands

Asian regulators are pushing companies to lift free floats to boost stock market liquidity. While there are implications from so much equity hitting the public markets, the flurry of re-IPOs offers a ray of hope for deal-starved bankers across Asia.

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Follow-on offerings have accounted for the vast majority of Asia’s equity capital markets business so far in 2012. Slumping IPO volumes mean that follow-ons account for 78.9% of deals done in Asia Pacific this year, including Australia by outside Japan, up from 55.2% for the whole of 2011.

Those figures, however, mask a growing number of deals that are new listings in all but name.

Companies from India to Indonesia are under pressure to put more shares in public hands as regulators step up their efforts to improve market liquidity. The Philippines, where as many as 40 companies risk having their shares suspended – or eventually delisted – if they fail to increase their free floats by the end of this year, has become a steady source of business.

“A re-IPO is essentially for really illiquid companies because their free float is too low and they’re being told by their regulators to do it. It’s not a special class of product. It’s more like an IPO than a follow on because, by its nature, it’s not owned by many people,” said one head of equity capital markets for Asia Pacific.

Philippines casino and hotel operator Bloomberry Resorts in early May priced a US$210m follow-on offering that increased its free float from 8.8% to around 20%. Century Property Group priced a US$54.5m deal in February, following on from a backdoor listing in 2011. Oil refiner Petron completed a Ps7.6bn (US$174m) block at the start of the year.

More are likely to follow from the Philippines, given the number of companies falling foul of the exchange’s rules that require a minimum free float of 10% by the end of the year.

Government-owned PNOC Exploration Corp has confirmed plans to boost its free float, while Maybank Kim Eng is said to have held non-deal investor roadshows for food producer San Miguel Pure Foods. Pure Foods has a tiny free float of just 0.08% and is required to meet the regulatory minimum of 10% by the end of this year.

In Indonesia, parent Indika Energy priced a US$100m block of Petrosea shares, effectively a re-IPO, in early February at a 20% discount to its February 1 close.

Tempo Scan Pacific’s Rp2.1trn (US$228m) re-IPO in May remains the largest Indonesian equity transaction so far this year. The pharmaceuticals company, which had a turnover of about US$200,000 a day, held a four-day bookbuild while the stock continued to trade, prompting fears that just a handful of sell orders could drag the stock below the target range.

On top of that, the company had earlier decided against non-deal roadshows, and only two domestic firms had research coverage of the stock. Nevertheless, Tempo Scan managed to dodge market risk and price an upsized deal at the top of its target range.

Tricky deals

Not every deal has been such plain sailing, however. The Petrosea block came far below the bottom-end of its guidance range, while Petron completed its deal only by offering a 17.3% discount to the last share price.

Indonesian insurance firm Sinar Mas Multiartha was forced to pull its re-IPO after premarketing in February. An offering of primary and secondary shares had been expected to raise around US$400m, via Deutsche Bank and UBS.

The challenge for arrangers is that the quoted price for an illiquid stock may offer little indication of the price other investors will pay. In many cases, trading is likely to remain thin even after the follow-on. Bankers say only a limited universe of investors are interested in such infrequently traded stocks, giving them a lot of power over pricing.

San Miguel Pure Foods, for instance, has a market capitalisation of around US$3.9bn, based on its 0.08% free float. When San Miguel Corp put the stake up for sale in an unsuccessful auction in 2010, however, the company was said to be worth around US$1.3bn.

With so many more re-IPOs in the pipeline – and market conditions far from stable – it is far from clear that the public equity markets will be able to support such a big volume of new stock.

“It’s all to do with sentiment. If the sentiment is good, then it’s not an issue at all, but if we continue with the current environment, with outflows, people sitting on cash rather than putting it in equities, then you have a problem,” said the ECM head.

In many cases, however, companies have managed to win extensions instead of selling equity into a depressed market. That may delay future deals – especially public offerings from state-linked companies. The clutch of re-IPOs at the start of this year, however, are a signal that regulators across Asia are determined to enforce their free float rules, and that determination is likely to drive deals for some time to come.

“It’s all to do with sentiment. If the sentiment is good, then it’s not an issue at all, but if we continue with the current environment, with outflows, people sitting on cash rather than putting it in equities, then you have a problem.”