HONG KONG (Reuters) - Li Ka-shing's Power Assets Holdings Ltd (0006.HK) downsized a Hong Kong IPO of its electricity business by nearly one-third to $3.6 billion, a sign that valuations for upcoming deals in the city will need to remain conservative to lure investors.
Power Assets will spin off the utility business into HK Electric Investments, a single-investment trust, offering 4.43 billion units in an indicative range of HK$5.45-HK$6.30 each, the company said in a filing on Sunday.
That would put the initial public offering at up to HK$27.91 billion ($3.6 billion). It was previously expected to reach up to $5.7 billion based on the top market valuation of the trust and an initial plan to float up to 70 percent of the business.
"Sometimes you go up with pretty aggressive valuations, then you start talking with investors and realize that you don't have a huge number of institutions that are actually supporting it," said Philippe Espinasse, a former equity capital markets banker at both UBS and Nomura and author of "IPO: A Global Guide".
"Then you're forced to reconsider with something that is more palatable," he added.
Power Assets said it will hold about 49.9 percent of the trust, compared with as little as 30 percent in the December filing. It also cut the expected maximum market capitalization of the trust to HK$55.7 billion from HK$63.4 billion.
While some recent IPOs in the city have soared since their debuts, the benchmark Hang Seng index .HSI is down 2.2 percent in the past year. That is a reality check for market aspirants looking to ride on Hong Kong's IPO surge in the final quarter of 2013.
The Power Assets deal will be the first of several mega-sized offerings in the city in 2014, a year that could have some $32.2 billion in new listings, advisory firm PwC estimates.
That would nearly double the 2013 tally of $17.1 billion and make 2014 the fourth-biggest year on record for IPOs in the city, Thomson Reuters data show.
The Power Assets deal will also be the biggest trust IPO in Asia ex-Japan since Li listed Hutchison Port Holdings Trust (HPHT.SI) for $5.5 billion in March 2011.
Power Assets said in December the IPO "will enable the company to continue to pursue new acquisitions in the global power industry, while maintaining a strong financial profile".
The reduced size of the IPO is not expected to hinder its efforts as the company has executed previous acquisitions without tapping the equity markets for funding.
The IPO will be only the third in the city by a single-investment trust, following HKT Trust (6823.HK), spun off from telecoms group PCCW Ltd (0008.HK), and hotel owner Langham Hospitality Investments Ltd (1270.HK).
Power Assets said it received initial commitments worth nearly $1.34 billion from two investors for the IPO.
Government-owned State Grid Corp of China agreed to make the largest commitment as a cornerstone investor, pledging up to HK$10 billion, while Oman Investment Fund agreed to buy HK$387.5 million, the filing said.
Cornerstone investors receive a guaranteed allocation in exchange for agreeing to retain their stakes for a set period.
The trust is expected to pay a distribution yield of 6.26 percent to 7.24 percent in 2014, the company said on Sunday.
($1 = 7.7547 Hong Kong dollars)
Editing by William Hardy, Matt Driskill and Ryan Woo