Swire had to rethink the IPO of its property business over the past two years as conditions changed, but its determination – and support of its banks – allowed it to meet its objectives, providing an unusual model for companies looking to raise capital in a tough environment.
Swire Pacific, one of the oldest companies in Hong Kong with a history dating back to the early colonial period, has an enviable ability to access capital.
While the conglomerate has simply refused to let market conditions get in the way of its strategic goals in recent years, the group’s approach to the capital markets needed to change. Having decided to sell its property unit and streamline its corporate structure, the group has been focused on completing its strategic objectives.
The group’s original plan for a US$2.7bn Hong Kong IPO of Swire Properties had to be shelved in May 2010 after poor market conditions made it impossible.
Instead, it raised money through the sale of commercial property complex Festival Walk for US$2.43bn in July 2011, and then followed that up with a listing by introduction on the Stock Exchange of Hong Kong in January this year.
Listing the property arm by introduction – a method where no funds are raised or new shares issued – gave the parent company the platform it needed. The group’s immensely profitable, but capital-intensive, property division would now be able to fund itself independently from the rest of the group.
It wasted little time in demonstrating that ability. Barely six months later, the property unit made its debut in the US-dollar bond market with a US$500m 4.375% 10-year benchmark, priced to yield 280bp over Treasuries or 4.428%. The deal drew orders of US$5.8bn from 270 investors – not bad for a first-time borrower.
However, the defining trades came later, when the Swire group used its new platform to full effect. On August 14, parent John Swire & Sons raised HK$5.02bn (US$645m) from the sale of a block of its shares in Swire Properties.
The move increased the property company’s public float to 14.28% from 10.28%, improved the stock’s liquidity and diversified the shareholder base: only shareholders of parent Swire Pacific were able to participate in the original listing.
Less than two months later, JSS was back with another block, selling its entire remaining stake in Swire Properties, another 217m shares, at HK$22.51 each, raising HK$4.88bn at a 6% discount to the last traded price. That block trade further increased the free float to 17.99%, paving the way for the stock to be included in MSCI indices later this year.
The pair of trades allowed the holding company to monetise its stake, but also effectively completed the group’s original objectives of spinning off the property unit and rationalising its corporate structure.
JSS no longer has a direct stake in Swire Properties, but does have an indirect interest through its shareholding in Swire Pacific. Swire Pacific, in turn, holds an 82% stake in Swire Properties.
With many IPOs still in limbo after a dismal year for Asia’s primary equity markets, the Swire model offered an option for other Hong Kong-listed companies looking to list their assets on the bourse, or overseas-listed companies seeking a dual or secondary listing in the city.
The whole package, however, required a fair amount of determination, and illustrated the lengths needed to complete a jumbo listing in difficult market conditions.
Having attempted a primary listing in 2010, Swire adapted its plans to list the property business by introduction, but it also required the full support of its banks.
The first JSS block trade cost the banks a fair chunk of their fees. JSS sold 234m shares to BOC International, HSBC and Morgan Stanley at HK$21.53 each. The bookrunners, however, placed the shares at HK$21.46, at the bottom of the target range and 10% below the pre-deal spot, absorbing a US$2.1m loss.
Swire did not stop there. The second block trade, two months later, came despite a 90-day lock-up clause. In other words, JSS should only have been allowed to sell its remaining shares in Swire Properties when the lock-up expired on November 14. JP Morgan joined this second trade as a fourth bookrunner.
Agreement from the three banks on the first trade to waive the lock-up, however, enabled the seller to dispose of its entire remaining stake in Swire Properties more than a month earlier than expected.
“The stock traded persistently higher than the placement price in August, and investors actually made money from that deal. Waiving the lock-up will help remove an overhang for the stock, boost the company’s free float and lift its chance of being included in some indices,” said a banker at one of the leads.
At the time of writing, Swire Properties shares were up 36% since listing, making it Hong Kong’s best-performing IPO of 2012.
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