China's big pork IPO brought low by blunders and bad luck
HONG KONG (Reuters) - On the face of it, an IPO for WH Group (0288.HK), the world's biggest pork company, should have been an easy sell.
China has huge and growing demand for pork and WH Group, a company created when China's largest meat processing firm acquired the world's biggest hog producer Smithfield Foods Inc, is well placed to deliver growth in what is still a highly fragmented market.
But this week, WH Group slashed its proposed IPO size by two-thirds to $1.9 billion - a result, fund managers and bankers say, of the company and its owners seeking too high a price, hiring too many underwriters (a record 29), as well as negative publicity over some sky-high executive compensation.
The company also had sheer bad luck as sentiment towards new listings slid worldwide.
WH Group started testing investor appetite about a month ago, but by the end of the Easter holiday, the writing was on the wall - it had to be revised down, sources involved in the deal said. Pulling it would have been an expensive option as WH Group needs the funds to repay debt incurred in its $4.9 billion acquisition of Smithfield, they added.
"The company was a little too aggressive in the early stage of their marketing process. They were hungry for a large deal at quite a demanding valuation, plus the market, near term, didn't turn in their favor," said Tony Chu, a Hong Kong-based portfolio manager at RS Investments.
From the get go, many investors and some underwriters had concerns about the deal because WH Group was looking to list just seven months after the Smithfield purchase, too short a time for it to have wrought synergies from the integration, people familiar with the IPO said.
Still, the offering should have drawn investors if priced right, but that, say financial sources who worked on the deal, is exactly what didn't happen.
Launching the IPO two weeks ago, WH Group set an unusually wide indicative range of HK$8.00 to HK$11.25 - a 40 percent difference between the top and bottom end, ignoring several bankers' recommendations to price the deal more modestly.
"The range was very wide, which indicated they didn't want to believe what the market told them during the pre-marketing period, which was for a P/E of 15 times," said one person involved in the IPO who was not authorized to speak publicly on the matter.
"They thought: OK maybe we can get 20 times, so let's make it wider. The market hates that," the person added.
At the top end of the range, pricing also implied a value of about $13.5 billion for Smithfield, nearly double what WH Group paid, according to calculations by Breakingviews, a Thomson Reuters publication.
Asked about the pricing, WH Group said in a statement: "The valuation range is a technical consideration which was jointly decided by the company and the sponsors in light of the market conditions and multiple factors."
It added it was fully confident in its future outlook. "By consolidating our operations as the world's largest pork company, we can generate immense synergies," it said.
Shareholders that were looking to sell shares under the initial plans included China private equity firms CDH Investments and New Horizon, Goldman Sachs (GS.N) and Singapore sovereign wealth fund Temasek TEM.UL. Goldman, Temasek and CDH declined to comment on WH Group's pricing, while New Horizon didn't respond to a request for comment. Under the revised deal, shareholders will no longer cash out in the IPO.
The revised offering is equivalent to a 2014 price-to-earnings multiple of 13.9-19.3 times from 15.0-20.8 times previously, sources said. By comparison, global listed peers trade at an average of 17.5 times forward price to earnings, according to Thomson Reuters data.
"I can understand why the market would add a risk premium to this deal, just because of its complexity and of its short life history since coming together," said Keith Pogson, managing partner for financial services at consultancy EY in Hong Kong.
NO CORNERSTONES, NO ANCHORS
The company's failure to attract cornerstone investors underscored the lack of agreement about pricing.
Most large IPOs in Asia will secure cornerstones, who receive a guaranteed allocation in exchange for agreeing to retain their stakes for a set period. They put up their hand ahead of the indicative price range being set but have informal discussions about a likely valuation.
A lack of cornerstone investors for sizeable offerings while unusual is not unprecedented, with Chow Tai Fook Jewellery Group Ltd (1929.HK) and Prada SpA (1913.HK) both managing to debut without them, and WH Group was undeterred, wooing so-called "anchor investors" willing to buy big chunks of the offering.
But then, after a long strong run, world stock markets pulled back and new listings began to flounder, causing anchor investors to get cold feet, people working on the IPO said.
More than half of the 25 companies that have gone public in April have priced their offerings below the expected range - the second highest number for a given month since June 1998, according to Thomson Reuters data.
"Some of the deals, when they got listed, dropped more than 10 percent. It just scared people to put their money in IPOs again," said Jasper Chan, corporate finance officer at Hong Kong brokerage Phillip Securities.
To make matters worse, the prospectus revealed WH Group paid a combined $600 million share award to Chief Executive Wan Long and the head of its M&A department for clinching the Smithfield acquisition - equivalent to 12 percent of that deal and raising corporate governance concerns.
The record number of banks managing the IPO resulted in a lack of coordination, irritating fund managers. It also created few incentives as they all shared in the fees.
"When you got the pie diced so thinly, are the bankers really motivated?" said Pogson of EY.