Monday, November 16, 2009

Big & Juicy (Or Is It Dicey) IPOs - Sands China & UC Rusal

Sands China, the Macau casino operations owned by Las Vegas Sands (LVS), yesterday kicked off the roadshow for its Hong Kong initial public offering with the aim of raising between HK$19.41 billion and HK$25.96 billion ($2.5 billion to $3.4 billion). The launch came on the same day that China Minsheng Banking also launched its $3.6bn IPO, which looks set to become the largest Hong Kong listing so far this year.

The institutional tranche for Sands Asia, accounting for 90 percent of the shares, has apparently been "multiple times" oversubscribed. The Macau unit of billionaire Sheldon Adelson's casino company will offer locally 10 percent of its 1.87 billion shares at between HK$10.38 and HK$13.88. It costs around HK$5,608 for a lot of 400 shares. Sands China will spend 42 percent of the net proceeds on repaying shareholder loans and inter-company payables, and one-fourth on the completion of Parcels 5 and 6 in Cotai.

Michael Leven, chief operating officer of Las Vegas Sands, said as a growth company, Sands China requires a certain amount of earnings to be retained to develop the Cotai project. Sands China will seriously consider more rapid growth or dividend issuance only after the monetization strategy kicks in. Chairman Sheldon Adelson said Sands China will sell the non-core assets such as shopping malls and serviced apartments. The capitalization rate on malls will increase as they take time to benefit from full hotel operations. He said net debt will drop from 2.86 times to around 2.3 times on the offering day while the full operation of Parcels 5 and 6 in 2012 will further bring its leverage to below one time.bankers argue that Sands China could be the ticket.

The casino operator, which is owned by Las Vegas gaming magnate Sheldon Adelson and holds one of six casino licences in Macau, already controls about 30% of the mass market and is raising money that will go partly towards the re-starting of a development project on the Cotai Strip that was halted last year as the parent company was running out of cash. According to syndicate analysts, the company is also in a prime position to capitalise on any growth in retail spending by Chinese visitors to Macau as it operates about 74% of all grade-A retail space available in the former Portuguese colony.

As I considered the Wynn Macau offering to be an avoid, and a purer gaming play, hence my view on Sands China is even bleaker - although I think their Marina Bay unit is more attractive if you can hive that out. Big offerings like this are market-timed vehicles, it can cause you to lose a lot of money (e.g. going 10%-20% below IPO) if you get caught in a wrong market mood when its actually listed. But at the same time can get you 10% (looks to be the topside considering the size of the offering) upside if the market mood stays good.

A more combustible and heady IPO, closely watched by all foreign media, is the listing of UC RUSAL, a vehicle owned by one of Russia's favoured sons, Oleg Deripaska. Well, they can't list in Russia for now owing to the market sentiment there. Surprisingly, they bypassed London as well, which was considered as a natural for a company like this.

Before a planned $2 billion Hong Kong IPO in December, the world's largest aluminum producer UC RUSAL is close to a deal to restructure $7.4 billion in debt to foreign banks, according to The Wall Street Journal. Controlled by Russian oligarch Oleg Deripaska, the aluminum producer is expected to announce the deal as early as next week, which will allow it seven years to repay $16 billion of debt. HK regulators are expected to give the green light to RUSAL's listing on November 19.

United Company RUSAL is the world leader in the aluminum industry sector, implementing the full production cycle from the extraction of bauxites to the manufacture of primary aluminum and alloys. The company has operations on five continents and in 19 countries around the world. The market share of the company encompasses approximately 12% of the entire global output of primary aluminum and 15% of the world’s alumina production, the necessary raw materials for manufacturing.

United Company RUSAL was founded in March 2007 by the merger and consolidation of RUSAL, SUAL, and the alumina assets of the Swiss company Glencore. Currently the company is comprised of 15 aluminum smelters, 12 alumina refineries, 7 bauxite mines, 3 foil rolling mills, and power-generating assets. UC RUSAL employs more than 100,000 persons at within its structure.

The Russian billionaire is in the final stages of agreeing a restructuring deal with foreign creditors on $7.3bn in debts, a vital precondition for the initial public offering valued at between $1bn and $2.5bn to go ahead. But even if the tycoon reaches agreement in time for a key November 19 hearing at the Hong Kong Stock Exchange, he must still race to win creditor committee approval from the more than 70 banks by the end of November and then market the sale to investors in the two weeks left before most leave for Christmas in mid-December.

It would be the first time a big Russian company has listed on the HK bourse, but they should perhaps first ask why Mr Deripaska is not going straight to London - long the natural harbour for large commodities groups seeking funds on the market. What is the attraction of HK, if not the lure of easy money and bucket loads of liquidity and enormous interest from China over resource plays? All adds up to a recipe for a big truckload of bad things waiting to happen - too eager, too much backslapping, too many wink-wink nods, ...

Could it have anything to do with his problems in the UK, where he is facing legal action, including a suit in the high court from a former partner in Rusal claiming massive compensation? Clearly, the uncertainty surrounding a case that could potentially cost Rusal up to $4bn is mathematical sum that is hard to put inside research reports. The last-minute withdrawal of Goldman Sachs as a lead adviser on the IPO underlines the risks surrounding what would be one of the biggest offerings of the year. Goldman Sachs withdrew as a lead adviser just one week before the company filed its initial application to the Hong Kong Stock Exchange on October 2, because it said it needed more time to familiarise itself with the deal, people close to the situation said. That should be the key already, where in the world would Goldman Sachs relinquish the right to lead a massive IPO if not for "graver concerns".

Mr Deripaska, once Russia’s richest man, has been dogged by issues surrounding his past partnerships in the Russian aluminium industry in the 1990s, a time when it was racked by crime. He is being sued by one former partner, Michael Cherney, in London’s High Court for a stake in his UC Rusal; Mr Deripaska contends he owes nothing to Mr Cherney, who he claims was not a partner but ran a protection racket to extort money out of his company. Mr Cherney denies any ties to organised crime.

IPOs being IPOs, in HK the IPO market is in full swing, issues are very huge, they suck up a lot of liquidity - anything untoward happening to just one could derail the overall markets for s sustained period, and will affect capital flows negatively for the rest of Asia. Enough said ....

p/s photo: Fiona Xie Wan Yu


Yappy said...

Sir, just curious and ask, are you a Michellian?

bindi said...

Hi Dali
Just to touch on HK IPOs, I noticed you have not written anything about Robert Kuok's exit from the sugar biz and what is your view on Wilmar's IPO which is due sometime in January. Will this be part of the Chinese Capricorn effect? Will the local funds be eligible for Wilmar's China IPO as an exit plan for RK from M'sia's sugar biz? How would that affect
3A? This is the cheapest proxy to Wilmar's China exposure. Hope for your comment.

Ali Bhai