PCCW to launch up to $1.4 billion trust IPO on Wednesday

HONG KONG Tue Nov 8, 2011 6:00am EST

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HONG KONG (Reuters) - Hong Kong's PCCW Ltd (0008.HK) plans to launch on Wednesday an up to $1.4 billion IPO for its telecoms business, two sources said, braving volatile global markets as the deal's novelty and fixed-income like structure aim to lure yield-hungry investors.

The IPO could raise between $1.2 billion and $1.4 billion, two sources with direct knowledge of the plans told Reuters on Tuesday. The sources declined to be identified as they were not permitted to speak publicly on the matter.

It would be the biggest offering in Hong Kong since the $1.77 billion IPO by Citic Securities Co Ltd (6030.HK) in September.

Companies around the world have canceled or delayed listing plans the past several weeks because of volatile global markets and concerns over Europe's debt woes.

In Hong Kong alone, weak investor appetite forced Sany Heavy Industry (600031.SS) and rival XCMG Construction Machinery Co Ltd 000425.SZ to postpone some $4.5 billion of offerings in late September.

Despite an 11 percent rally in Hong Kong's benchmark Hang Seng index .HSI the past month, the index is still down 14.5 percent since the beginning of the year as investors dumped emerging market assets.

"Hong Kong markets have had some recovery recently and the timing for the IPO is probably not too bad in terms of attracting investors," said Patrick Shum, president of BMI Funds Management in Hong Kong.

"In the longer term, investors see PCCW's trust company as more of a defensive play given stable returns due to its trust structure, but it won't be seen as a high-growth play due to the competition it faces with other players in a mature market, such as Hong Kong."

The company, which is spinning off the telecoms business into HKT Trust, started pre-marketing the deal on October 25 to investors in Asia, Europe and the United States and was slated to start the roadshow this week.

The trust will offer units at a 2012 yield of 7.5 to 8.9 percent, the sources added.

PCCW declined to comment on the IPO plans for the telecoms business.

PCCW, whose chairman is Richard Li, will list so-called share stapled units. The deal would be the first single investment trust in Hong Kong, which competes fiercely for listings with Singapore where business trust offerings are common.

Business trusts are popular with companies because they allow them to raise cash without relinquishing control. In a business trust model, the trust sells units to investors, but control of the business is left with the trustee manager, who is usually an affiliate of the company establishing the trust.

Each share-stapled unit of the PCCW telecoms business comprises a unit of HKT Trust, a preference share in HKT Limited and an interest in ordinary shares of HKT Limited held by the trustee manager.

'GENUINE TRADE'

PCCW is counting on demand by yield-hungry investors to drum up interest for the IPO.

The company said in filings for the offering the HKT Trust would have a minimum market capitalization of HK$28.6 billion ($3.7 billion) and distribute at least HK$2.57 billion to holders of the units in 2012. That would imply a yield of 9 percent for 2012, but the yield could be lower if HKT Trust is valued higher.

"Generally, investors are showing very strong interest in this trade," said one of the sources with knowledge of the deal. "The worse the market performs the more genuine this trade has become."

The offering should help the company reduce the debt load from the telecommunications group, reducing interest expenses and allowing the trust to distribute more cash to its holders, PCCW has said.

China International Capital Corp (CICC), Deutsche Bank (DBKGn.DE), Goldman Sachs (GS.N) and HSBC (HSBA.L) (0005.HK) were hired as joint global coordinators for the offering, with JPMorgan (JPM.N), Standard Chartered (STAN.L) (2888.HK) and Singapore's DBS (DBSM.SI) helping to underwrite the deal.

($1 = 7.770 Hong Kong dollars)

(Additional reporting by Lee Chyen Yee; Editing by Matt Driskill and Muralikumar Anantharaman)

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