2006: Building on growth

Growth capital was very much the flavour of the year throughout 2006, as companies across Asia turned to the equity markets and overseas acquisitions in search of expansion opportunities. Two more Chinese banks sealed massive Hong Kong listings, culminating in ICBC’s world-beating US$22bn float.

Leveraged finance was booming, too, with private equity firms eyeing cheap debt as they chased opportunities in South Korea, Taiwan, India and especially Australia. Corporate dealmakers soon caught on, and by the end of the year Tata Steel was locked in a high-stakes battle for Europe’s Corus.

IFR Asia 436 – January 14, 2006

Indian government makes history with Maruti divestment

The Indian government is an unlikely catalyst of equity market innovation, but India last week saw a selldown of a secondary stake in car-maker Maruti Udyog via a unique transaction that was dictated by the conflicting ideologies within the ruling coalition.

The sale of an 8% stake in Maruti raised Rs15.67bn (US$356m) through an auction structured in a way that that has never been seen before in Asia.

Equity sales via auctions are rare but far from unheard of. The most high-profile recent examples come from the US – the IPOs of Google in August 2004 and Morningstar in May 2005. However, such deals are structured using a common clearing price at which investors are allocated the shares on offer.

In the case of the Maruti auction, on the other hand, the highest bidders received all the shares they bid for at the respective bidding prices until there were no more shares left. Another twist was that bidders were not allowed to put in multiple bids as they are usually permitted to do in normal equity auctions.

The government was forced to structure the auction in that way because it had to convince leftist elements in the ruling coalition that the deal would unarguably get the highest possible price.

In order to overcome the objections of the leftists, who oppose privatisations of profitable state firms and do not want foreign investors taking advantage of the privatisation process, the government also restricted the auction to state-owned banks and financial institutions (FIs).

Looked at purely from a pricing point of view, the deal proved a great success for the government.

Despite the narrowed investor pool, the auction of 23.1m shares saw demand for 41.2m shares from 36 bidders. The highest bid was at Rs725 per share, while the lowest bid came in at the floor price of Rs620. The average bid price was Rs664 with the deal being fully covered at Rs660, which bankers involved said would have been the common clearing price in a normal bookbuild.

Thanks to the unusual structure of the deal, though, the government ended up with a much better price, with eight bidders getting all the shares on offer at a volume weighted average price (VWAP) of Rs678.24 per share – a 4.2% premium to the previous close and a 2.25% premium to the VWAP of the previous five days trading.

Achieving a premium is unprecedented for any domestic equity offering from India.

On the day following the trade, Maruti’s shares closed at Rs663, up 1.8% from the pre-auction close of Rs651, but still well below the VWAP paid at the auction. On the same day, the BSE Sensex – of which Maruti is a constituent – traded down around 0.7%.

Quite how successful the leftists will be in restricting Maruti’s equity to state institutions remains to be seen. The successful bidders are now locked up for six-months, but after that they are free to sell to whoever they choose.

The deal, which was arranged by Kotak Mahindra and SBI Capital Markets, was so successful that the government is

now likely to sell the remaining 10% it holds in Maruti, presumably also via an auction.

IFR Asia 450 – April 29, 2006

KKR configures India’s largest LBO with Flextronics buyout

Mandated leads Citigroup and Merrill Lynch look to have cracked the secret for structuring leveraged buyout (LBO) financings from India. The two banks were last week preparing to launch a US$360m seven-year LBO for Flextronics Software Systems (FSS), only the second LBO from India and one that could set the template for future buyout financings from the country.

The deal partially finances the US$900m acquisition by Kohlberg Kravis Roberts (KKR) of FSS from Singapore-listed electronics components manufacturer Flextronics. KKR will take an 83% stake, Flextronics will retain 15% and the balance will be held by FSS management.

Market participants were keenly awaiting details of the deal’s the structure and how it deals with India’s archaic regulations.

Under external commercial borrowing guidelines, Indian companies are not allowed to borrow for purposes other than capital expenditure and infrastructure financing. While that rules out Indian companies from using LBOs, it does not stop foreigners from doing so. Foreign companies acquiring Indian companies, however, face hurdles in repatriating cashflows and dividends, thus killing any possibilities of classic LBO financings.

The leads will be hoping to capitalise on the sudden drought in LBO deal flow from Asia that has left a lot of leveraged desks at banks in the region gagging for high-yielding assets. Outside of Australia and Japan, LBO financing in the region has virtually come to a standstill, with the traditionally strong market of South Korea suffering from a backlash against supposedly exploitative private equity funds.

FSS is KKR’s first acquisition in India and only its second in Asia.

IFR Asia 476 – October 28, 2006

Jump-ball fee split on ICBC sparks bloody scrap

Hong Kong-based ECM bankers last week enacted one of their more bizarre and brutal rituals – the ultra-aggressive game of claiming fees via the jump-ball system. The banks were fighting over the fees thrown off by the HK$108.6bn (US$13.95bn) H-share tranche of the Industrial and Commercial Bank of China (ICBC) IPO.

With a gross spread of 2.5%, the deal’s five bookrunners, 10 co-leads and nine co-managers were looking to divvy up US$346m, out of the total fee pool (after adding the 1% broking commission) of about US$487m.According to the deal’s co-leads, the fee battle has taken a particularly ugly twist.

“An investor said that he received five phone calls stressing that, if he did not withdraw his designation, he would not be shown future Chinese deals,” said an ECM banker from the ICBC syndicate. “The investor was told the Chinese government disapproved of designations away from the bookrunners.”

Clearly, the jump-ball system is a blood sport – institutions have 48 hours to lobby on designations and, on a fee basis, this is the most efficient marketing work a banker can do. The amount of orders that are collectively attributed to a given institution will directly translate into that bank’s share of the selling commission.

None of this should, however, overshadow the striking success of the deal. With a US$19bn funding size, ICBC was the world’s largest IPO. A greenshoe, which has been allocated and will almost certainly be exercised, will take total proceeds to about US$22bn. The deal was also the first simultaneous dual listing in the Hong Kong and Shanghai markets, and it closed its first morning’s trade up a respectable 15%.