In a year full of uncertainty, getting any big deal done in the Hong Kong market was an achievement, let alone pricing one at a premium to the last traded price. For its perfect timing, meticulous planning and flawless execution, AIA’s US$2bn block trade is IFR Asia’s Hong Kong Capital Markets Deal of the Year.
Premium pricing is a rare achievement on any block trade, let alone a US$2bn deal that investors had been expecting. Yet, American International Group’s second disposal of AIA shares in 2012 was crafted in such a way that investors were willing to bite at a premium to the last traded price. The short squeeze that followed lifted the share price further and raised much-needed funds for a seller under pressure to repay US government loans.
AIG had already raised US$6bn in March from the sale of part of its stake in AIA, its former Asian unit. The March 6 disposal came with a 180-day lock-up period.
With AIG widely expected to trim its position in AIA further once the lock-up period expired, the market knew the US insurer would almost certainly announce another trade in September. There was heavy speculation that AIG would sell its remaining 18.8% stake in a clean-up trade worth around US$7bn.
The deal duly arrived on September 6, just two days after the lock-up expired. However, it was smaller and had a more aggressive price range than investors had been expecting.
The 600m-share offer was marketed at an indicative price range of HK$25.75–$26.75 each, or at a discount of 2.1% to a premium of 1.7% to the stock’s closing of HK$26.30 on September 6.
A premium price had never been attempted on a deal of such size in Asia, but the smaller-than-expected deal allowed the seller and its leads to complete what looked to be an impossible mission in markets that were still far from bullish.
Many investors had taken short positions on AIA, and the leads judged – correctly – that the overhang had been holding down the stock.
“To be fair, the share price of AIA should trade around HK$30, if not because of the potential selldown. Short positions have been built and the stock has been undervalued for a long time. Pricing at a premium is not totally impossible,” said an investor at the time the deal was launched.
Other investors were clearly on the same page.
The book was covered within an hour and this
early momentum enabled the leads to push for a premium. In the end, the deal comprised 591.9m shares priced at HK$26.50 each, a 0.8% premium to the pre-deal spot.
The book was multiple times covered with more than 200 investors participating. Although more than half of the demand came from hedge funds, only about US$400m of orders were said to be related to short covering.
About 56% of the demand came from hedge funds, 38% from long-only funds, while private wealth-management accounts accounted for the remaining 6%. Half of the demand came from Asia, 35% from the US and 15% from Europe.
Despite the premium price, investors who bought the shares got a decent return. To secure a strong aftermarket performance, Deutsche Bank and Goldman Sachs, the active joint global co-ordinators and joint bookrunners, allocated a disproportionate amount of shares to long-only funds.
As a result, hedge funds that did not get enough shares to cover their short positions had to buy AIA shares in the secondary market, thus supporting the stock’s price.
AIA shares traded up 6.8% to close at HK$28.10 on September 7.
Bank of America Merrill Lynch, Barclays, Citigroup, HSBC, Morgan Stanley, JP Morgan and UBS were the other joint bookrunners.
AIG used the proceeds to fund part of a US$5bn buyback of its stock from the US Treasury barely a week later. There is a 90-day lock-up on AIG’s residual shareholding in AIA, which equals to 1.6bn shares or a 13.7% stake.
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