Companies have made good use of spinoffs in recent years to extract value from cash-rich assets, but the trend may decelerate as interest rates rise.
Asia’s blue-chip companies have discovered one of the best ways to unlock value from assets and make their shareholders happy is to spin them off into a separate unit.
The growing number of investors focused on Asia has largely snapped up the offerings.
“A new set of institutional investors wants to have a piece of the Asian growth story and spinoffs allow them to invest in well-known managements,” said an ECM banker.
The strategy has become particularly popular since stock exchanges in Singapore and Hong Kong have allowed listings of business trusts, which, similar to real estate investment trusts, contain assets offering steady cash flows that are converted into a guaranteed dividend yield for investors. In both BTs and REITs, companies retain 30% to 50% stakes.
Hong Kong conglomerate Hutchinson Whampoa’s US$5.45bn listing of its ports business, HPH Trust, in Singapore in March 2011, made waves as the largest for the city-state at the time.
The listing pushed Hong Kong into allowing the BT structure on its exchange, where it has since attracted big deals, including Power Assets Holdings’ US$3.1bn IPO of Hong Kong Electric Investments, early this year.
What has become evident in the growing number of spinoffs is that timing has to be right to get the most out of them, and companies need to ensure investors understand the cash flows supporting the business.
Investors have liked business trusts, as well as similarly structured REITs, because the guaranteed yields have been more generous than many other alternatives in light of the low interest rate environment that has persisted since the global financial crisis.
Over the last five years, trust yields have been in the 5%–9% range, making them attractive alternatives to average corporate bond rates of about 5% and bank deposit rates of less than 1%.
“Equity investors wanting yields are the best bets for these issues to be successful,” said another ECM banker.
Timing the market has become all the more important for companies considering launching either a REIT or BT as interest rates are expected to rise in the second half of the year.
“Issuers and bankers have to do all the homework and be ready to launch deals at the shortest time possible.”
“The window for any issue is becoming smaller,” said one industry source. “Issuers and bankers have to do all the homework and be ready to launch deals at the shortest time possible.”
Japan’s Croesus Retail Trust is a good example. Its S$400m (US$319m) Singapore business trust IPO was shelved in November 2012 as investors in the city states at the time were not convinced foreign-linked assets made sense buy. The trust did well when it was relaunched in April 2013 as the outlook for Japan had improved.
Two Singapore BT listings from India are expected shortly. The companies hope to benefit from a surge of optimism over India since this month’s election results gave the pro-business opposition Bharatiya Janata Party a strong mandate to form a new government.
In the wake of the election, Larsen & Toubro Infrastructure Development Projects and Infrastructure Leasing and Financial Services restarted marketing of their respective business trust IPOs of US$700m and US$300m. Both companies, which are seeking to cut debts through spinoffs of their cash-rich businesses, had tried to complete the IPOs last year, but they pulled them amid more negative sentiment towards India.
Companies in the Philippines took advantage of the country’s newly minted investment-grade rating last year to launch sizable IPOs of spinoffs. The largest deal so far was a Ps38bn (US$869m) IPO of LT Group, a listed company, with a small float, which was injected with assets of several other companies, including those involved in tobacco, distillery, banking and property businesses, under the control of Philippine tycoon Lucio Tan.
Besides broadening its investor base, the listing allowed the company to make more efficient use of capital and for investors to gain exposure to what were previously privately held firms with significant businesses in the Philippines.
Bloomberry Resorts, Cosco Capital, Emperador, Melco Corwn, and STI Education also restructured their businesses before selling shares to investors last year.
Still, selling securities in South-East Asia is not always simple. That is particularly true in Thailand, which has been in the midst of political turmoil that shows little sign of being resolved since late last year. Nevertheless, BTS Group and True Corp succeeded with infrastructure fund IPOs last year amid still-strong liquidity flows.
“We were anticipating rates to harden further and took the chance,” said a banker associated with True Telecommunications Growth Infrastructure Trust Fund’s Bt48bn IPO.
The gamble paid off since the political situation has worsened and investor interest in IPOs has waned. That does not bode well for Jasmine International and Electricity Generating Authority of Thailand, which also plan to spin off assets into infrastructure funds.
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