Investment banks in Asia are counting on sales of large blocks of stocks to institutional investors in the coming weeks to bolster dwindling underwriting fees and spark the region’s equity capital markets back to life.
A spate of block deals in a down market may sound like wishful thinking, but banking sources are quick to point out that several stocks, with concentrated shareholdings, are at or near their one-year highs, making it ripe to lock into gains before the end of an otherwise tough year for most investors.
The market has already seen at least three blocks deals worth more than $2 billion in the past week, as vendors push through sales at the smallest available window of opportunity.
Other potential deals could include AIG’s $5.6 billion stake in insurer AIA Group Ltd, Carlyle Group’s $2 billion stake in China Pacific Insurance Group Ltd, and Bank of America Corp’s $9 billion stake in China Construction Bank.
For investors on high alert over Europe’s debt troubles and concerned about a slowdown in the USA and Chinese economies, buying into existing companies through block sales may be more tempting than venturing into untested IPOs.
“There is greater comfort if it’s an existing company,” said Binay Chandgothia, chief investment officer at Principal Global Investors (Hong Kong) Ltd. “Whereas if it were a new company then obviously the business risk is higher because there’s no track record,” he added.
Block trades are faster for an investment bank to execute than an IPO and very lucrative as fees are about the same of an initial offering, with the key difference being they get done in hours as opposed to several months it can take to complete IPOs.
Investment banks also monitor block league tables just as they would keep track of who tops IPO underwriting charts in a given year because a successful deal can bring repeat business from clients such as Singapore state investor Temasek.
There are 153 companies in Asia-Pacific with a market capitalization of $1 billion or more whose shares closed on Wednesday within 5 per cent of their 52-week high, making them prime candidates for future block deals.
Apollo Hospitals Enterprise in India, airport operator MAp Group in Australia, Telekom Malaysia, Japanese retailer Lawson Inc and Singapore developer United Industrial Corp. all trade near their one-year highs.
Locking In Gains
Block trades in the region excluding Japan have totaled $20.3 billion from 51 deals so far this year, according to Thomson Reuters data. That’s down 20 per cent from the same period in 2010, but far less steep than the plunge of almost 50 per cent to $67.5 billion for IPOs in Asia-Pacific.
On Tuesday, French tyre maker Michelin sold a $556 million stake in South Korea’s Hankook Tire and last week Baring Private Equity raised $51.6 million by selling a stake in Yingde Gases Group.
Goldman Sachs followed a day after Michelin with the sale of up to $1.5 billion in shares of Industrial and Commercial Bank of China Ltd (ICBC).
Block sales tend to happen after a stock rally or when shares of a company that went public trade far above its IPO price, prompting investors to lock in gains.
Michelin sold its stake just one day after Hankook shares hit a 52-week high, while Barings sale was 7.3 percent below the 52-week high set on Aug. 16. And Goldman sold its ICBC shares after a near 50 per cent surge in the stock last month.
As dealmakers look to lift underwriting fees before the year comes to a close, block deals have become one of the few options left to generate revenue.
In Hong Kong, investment bankers and fund managers see as almost certain in coming months part of AIG’s holding in AIA being sold after coming out of lock up on Oct. 29. AIA surged 26 per cent since its IPO last year to an all-time high in early August.
Still, the shares are down 17 per cent in the past three months, prompting Bob Benmosche, CEO of AIA parent AIG, to say last Friday the US insurer would “stand pat” on a possible sale of its prized Asian unit.
“I can’t see much getting done this year IPO-wise due to volatility of markets because of Europe’s credit and banking crisis,” said the head of equity capital markets at a leading investment bank in Hong Kong, who expects an AIA block sale before year-end and couldn’t speak publicly on the matter.
Daiwa Capital Markets said in a report dated Oct. 28 international investors in Chinese banks could also sell part of their holdings through stake sales. That would follow Goldman’s sale on Wednesday of ICBC and Temasek’s $3.6 billion sale in Bank of China and in China Construction Bank (CCB) in July, and BofA’s $8.3 billion sell-down in CCB in August.
Bank of America may further reduce its stake in CCB, a Chinese newspaper reported on Monday.
Block trades in China, the world’s second-largest economy, have hit $7.64 billion so far this year, more than double the $3.8 billion worth of deals in Australia or the $3 billion in South Korean offerings over the same period.
Morgan Stanley took the top post in underwriting block sales and worked on five of the top 10 deals, including Temasek’s Bank of China and CCB stake sales.
Goldman Sachs ranked second, followed by Bank of America Merrill Lynch, UBS and Citigroup, according to Thomson Reuters data.
Other large block deals included Cairn India’s $2.1 billion sale in April, which was managed by DSP Merrill Lynch, and a $1.8 billion sale in CPIC in January, handled by Goldman.
The focus on block sales comes as equity capital market issuance in Asia-Pacific has tumbled to $172.4 billion so far this year, compared with $259.1 billion in the same period last year, according to Thomson Reuters data.
The decline has been even more severe in the fourth quarter, with issuance down to $7.9 billion through early November, from $60.6 billion in the same period of 2010.
Overall ECM fees fell 18 per cent to an estimated $4.3 billion so far this year because of the decline in issuance. Just in the fourth quarter, usually the busiest for issuance, fees sank 84 per cent to $205.9 million.
Fund managers have increased their cash trove over the past few months, but given the volatility in global markets they don’t want to take the risk of buying an IPO that can drag the performance of their funds as the year is drawing to a close.
Buying into existing listed shares through a block deal might be a less risky alternative.
“You’re much more confident of the price performance of a block trade,” said an Asian equity capital markets banker, who could not discuss the matter publicly.
Leave Your Comment
5 years ago
Strides Arcolab, the Bangalore-based publicly-held pharmaceutical company, is...
4 years ago
AION Capital Partners, the largest special situation fund in India, launched by...
5 years ago
Infotech Enterprises Ltd, an Indian software services provider to aerospace and...