Besides providing exposure to a myriad of businesses, LT Group from the Philippines gave investors a piece of the country’s growth story.
LT Group, a holding company under the control of Philippine tycoon Lucio Tan, took advantage of global investor interest in one of the world’s fastest-growing economies and in one of the best-performing stock markets in Asia, to broaden its investor base with a 37.7bn pesos (US$874m) offering.
The 1.84 billion share offering was the largest equity deal, excluding rights offering, to come from the Philippines after a US$610m IPO from Cebu Air in October 2010.
The sale benefited from a bit of good fortune for the Philippines. Traditionally one of the most illiquid markets in South-East Asia, the nation got a boost just a month earlier when Fitch increased its rating for the Philippines to BBB-, a low investment grade rating. Stock investors noticed, pushing the market up 14% for the year through October 21.
The change in sentiment meant there were plenty of investors around for LT Group’s follow-on stock offering when it was launched on April 17.
LT Group is the new name for Tanduay Holdings, which had traded on the Philippine stock exchange for some time, but was highly illiquid, with a free float of only 10.4%. The new name came about after Lucio Tan added his family’s stakes in several unlisted firms to the holding company. Tan then reduced the stake of Tangent Holdings, his main family holding company, in the newly named LT Group. Tangent now owns 74.4% of LT Group, down from 89.6%.
“Tangent Holdings wanted to put its shareholdings in various companies in one listed holding company (LT Group) to make efficient use of capital,” said LT Group president Michael Tan.
“The management’s view was that, as a restructured group, it would be able to get significant funding from investors in the short to medium term,” said Tan, who is Lucio’s son.
The sale gave investors an opportunity to gain exposure to privately held companies with significant businesses in the Philippines, including tobacco company PMFTC, beverage company Asia Brewery, distillery company Tanduay Distillers, Philippine National Bank and property developer Eton Properties.
Holding companies usually have to offer investors a discount because the diverse natures of the various businesses they house make them difficult to value. Often, the businesses within a holding company are also individually listed, so shareholders can gain exposure to them directly.
The discount for LT Group “was not very pronounced because it was the only vehicle through which investors could have accessed the group’s unlisted businesses,” according to the younger Tan.
“On the first few days of the roadshow, we were selling the company and, in the last few, the investors were marketing themselves to us and explaining why we should allocate shares to them.”
Also, the different components of LT Group have large market shares in their respective businesses. In 2012, PMFTC had a 90.7% market share of the tobacco business in the Philippines and Tanduay Distillers had a 29% share of the domestic spirits market, according to the offer document. PNB is the fourth-largest private commercial bank in the country, and Asia Brewery is among the top beverage makers in the Philippines, the document said.
LT Group’s main challenge was that it was not well known to international investors. To address this factor, the management conducted a non-deal roadshow several months ahead of the actual launch of the offer.
“On the first few days of the roadshow, we were selling the company and, in the last few, the investors were marketing themselves to us and explaining why we should allocate shares to them,” Tan said.
Positive investor feedback gave the company confidence to go ahead with a sizable offering. “The issue size was based on the different businesses the group owns,” Tan said.
Investor feedback also played a part in determining which of Tan’s assets would go into the newly created LT Group. The management dropped the idea of adding Philippine Airlines to the holding company because some investors felt they did not want any exposure to the fluctuating air transport business.
The April offering of 1.84bn shares included an overallotment option of 240m shares. It was priced at Ps20.50, the top of the Ps18.00–Ps20.50 indicative range, or at 16.3x 2013 earnings. The price was at a 12% premium to the April 5 closing of Ps18.30.
The overall response to the offer was strong as more than 130 accounts participated. The deal was 7x covered, not including the cornerstone tranche. This was the largest order book garnered for a Philippine equity offering.
“The LT Group was also the first Philippine equity offering to have a formal cornerstone tranche,” said Lauro Baja, country head for the Philippines at UBS, sole bookrunner on the offering. Credit Suisse, Deutsche Bank and JP Morgan were co-lead managers.
“We roped in the cornerstone investors to de-risk such a large transaction and get price-and-demand tension during the bookbuilding process,” Baja said.
The 11 long-only cornerstones for the LT Group offering were Capital World, Fidelity, GMO, Henderson, Invesco, Lazard, Morgan Stanley, Newton, UBS, Waddell and Reed, and Wellington. In total, the investors bought 1bn shares, more than half of the offering.
The timing also proved lucky for the company because the market had not taken a hit from the US tapering fears. In June, Philippine companies like Travellers International Hotel and Robinson’s Retail deferred their equity offerings and relaunched smaller-sized issues in the September October period.
For now, the management plans to use LT Group as a fundraising vehicle and does not plan to take public the other unlisted entities.
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