UPDATE 1-China's State Grid buys biggest chunk of HK Electric's IPO-sources

Sat Jan 11, 2014 7:00am EST

* HK Electric offering 5.5-7.26 pct annualised yield

* HK Electric set to be Hong Kong's biggest IPO since 2010

* Another sovereign wealth fund to join as cornerstone investor

By Denny Thomas and Michael Flaherty

HONG KONG, Jan 11 (Reuters) - Government-owned State Grid Corp of China is coming in as the biggest cornerstone investor in a Hong Kong initial public offering (IPO) worth up to $5.7 billion by Li Ka-shing-backed HK Electric Investments, people familiar with the matter told Reuters.

Li's Power Assets Holdings Ltd is planning to list its Hong Kong electricity business, HK Electric Investments, as it seeks funds for overseas expansion. The IPO is set to be launched on Monday, they added.

China's cashed-up state power groups have been expanding overseas, buying up bargains in the past few years. The dominant power distributor State Grid, which is the largest state utility in the world, has established a presence in the Philippines, Brazil and Portugal among other countries.

Last year, state-owned China Southern Power Grid and CLP Holdings Ltd agreed to buy Exxon Mobil Corp's Hong Kong power business for $3.4 billion.

Depending on the final pricing, State Grid will end up owning more than 15 percent, or about $1.2 billion, of HK Electric Investments after the IPO, set to be Hong Kong's biggest since AIA Group Ltd's $20.5 billion deal in 2010.

HK Electric is slated to list on Jan 29.

Li, Asia's wealthiest person, built his business empire by buying and selling companies across the globe. But in the last few years, Li has been adding more power and infrastructure businesses in Europe and other developed markets.

Cornerstone investors, including State Grid, are committing around 35 percent, or about $2 billion based on the upper end of the IPO estimates, one person said. The final size of the fund-raising will depend on the eventual IPO price, which will be determined through a book-building process.

CORNERSTONE INVESTORS

State Grid will be joined by other cornerstone investors, including a sovereign wealth fund, one of the people said.

Cornerstone investments in IPOs is an Asian phenomenon whereby certain funds or high net worth individuals commit to buy a specific number of shares at the IPO price and in return agree to stay invested in the company for between 6 to 12 months after the listing.

HK Electric, which started operations in 1890, provides power to about 568,000 customers and would have a market value of between HK$48 billion and HK$63.4 billion. Power Assets expects to own 30 to 49.9 percent of the trust, with the remainder sold in the market.

It would offer an annualised distribution yield of 5.5 to 7.26 percent, which has attracted investors to the deal. That compares with 7.7 percent for Langham Hospitality and 6.2 percent for HKT Trust.

Like most power generators and distributors, Hong Kong Electric Company operates as a regulated utility, its tariffs and level of earnings regulated by the Hong Kong government.

Power Assets forecast the trust's consolidated profit attributable to shareholder equity of at least HK$5.18 billion for the year ending December 2013, falling to at least HK$2.77 billion for the year ending December 2014.

Goldman Sachs Group and HSBA Holdings are the joint sponsors for the IPO.

Sources declined to be identified as the information is not public. Power Assets and State Grid were not available for immediate comment.

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