It took 72 hours of negotiations to save Malaysia’s biggest IPO
WHAT is being touted as one of Malaysia’s biggest initial public offerings (IPOs) in recent years nearly didn’t take off.
And if the plug had indeed been pulled on Lotte Chemical Titan Holding Bhd’s IPO, it would have sent the wrong message about the country’s capital market.
In the end, the Lotte Chemical deal was “saved” after some 72 hours of tough negotiations between the investment bankers working on the deal and Lotte Chemical, according to a source familiar with the workings of the deal.
The result is - the IPO will still take place this coming Tuesday, but the pricing and the number of share issuance have been slashed quite substantially.
Lotte Chemical, a producer of olefin and polyolefin and a unit of South Korean multinational ethylene producer Lotte Chemical Corp, will now be raising RM2bil less than the earlier envisaged total of RM6bil, but the option of killing off the deal would have had greater repercussions on the company, and the overall Malaysian capital market.
To get certainty that the deal did not fall through, those involved made the call to reprice the shares to RM6.50 from RM8 and cut the number of share issuance by one-fifth.
At this price, the integrated petrochemical producer will raise about RM4bil from the IPO and have a market capitalisation of RM15bil.
Things were going well during negotiations and local institutional funds were prepared to take up Lotte Chemical shares at the initial offer price of RM8.
But the foreign funds were not keen on that price, largely because of the sector that the company is operating in, the source says.
Global polyolefin, a raw material used in the manufacture of plastic products, is experiencing a surplus in capacity, according to reports.
According to a research report by Hong Leong Investment Bank, post-2017, the global polyolefin capacity surplus over demand is expected to widen further due to US shale-based capacity expansion and methanol-based China capacity additions.
“Our argument is further supported by the significant expected capacity addition in Asean by 2020, with Petronas Chemicals Group Bhd (PetChem) adding 1.4 million tonnes of polyolefin capacity, while Thailand’s SCG Chemicals will add another 1.4 million tonnes,” the house says.
To be sure, PetChem, which is Lotte Chemical’s closest competitor based here, also enjoys higher profit margins than Lotte Chemical because the feedstock it uses in its production process is subsidised by the Government.
Still, there was sufficient interest of local funds in Lotte Chemical and this resulted in four cornerstone investors, namely, Permodalan Nasional Bhd, Maybank Asset Management Sdn Bhd, Eastspring Investments Bhd, and Great Eastern Life Assurance (M) Bhd, which collectively took up 20% of the institutional offering.
Cornerstone investors normally are willing “price-takers”, meaning they can take up shares at the maximum price, in this case RM8 per share.
The source says that from the start, Lotte Chemical’s IPO was positioned as an institutional stock. “So, the fact that there was under-subscription of the retail portion was not unexpected.”
It does not help that retail investors tend to look at the absolute price as opposed to valuing a stock based on other financial indicators versus its peers.
In the case of the foreign interest in Lotte Chemical, it is learnt that hedge funds, which tend to be focused on short-term returns to some extent, were the ones who were keen.
“For the bankers, though, it was a case of getting in long-term, quality investors but at a price that they agreed on. So, that was what they did.”
In other words, it was no longer a case about investor demand at a pricing that the issuer wanted.
In terms of local funds, apart from the cornerstone investors, it is also learnt that the likes of the Employees Provident Fund and Lembaga Tabung Haji had also come in to take up stakes in the IPO during the book-building process.
That the IPO was repriced with a new structure on Monday says something about the increasing maturity of the infrastructure of the local capital markets, some bankers point out.
It is also learnt that a supplementary prospectus was not needed in Lotte Chemical’s case, as the changes weren’t considered a material issue.
Lotte Chemical is raising money for expansion as opposed to using proceeds to pare down borrowings as some companies do with IPOs.
While the amount to be raised is over 30% less than expected, RM4bil is still a substantial amount, with such a figure not seen since 2012 when larger listings like IHH Healthcare Bhd, Felda Global Ventures Holdings Bhd and Astro Malaysia Holdings Bhd came unto the market.
However, with the lower amount of money raised, there is now a change in the funding allocation for Lotte Chemical’s new integrated petrochemical facility that it plans to build in Indonesia.
The company is now allocating RM2.8bil, down from RM4.9bil before for this new plant which will be located next to its existing one in Merak, Indonesia.
The shortfall in capital expenditure is likely to be funded through borrowings, something it is nevertheless able to do given its strong balance sheet, some say.
Others reckon that even if the IPO did not happen, the company would still have gone ahead with this expansion, as it is able to use internally generated funds and borrowings. The company has RM965.1mil in net cash. For the financial year ended Dec 31, 2016, it made a net profit of RM1.31bil.
The allocation of IPO proceeds for its Malaysian projects, meanwhile, remains unchanged.
There is no discounting that developments in this past week could possibly weigh on Lotte Chemical’s share price performance when it makes its debut on the local bourse next week.
However, the impact may not be great because there is a structure akin to a green shoe option that has been put in place due to the repricing of the IPO.
Under this structure, retail investors and non-cornerstone bumiputra investors approved by MITI would be allowed to sell shares back to the company at RM6.50 for five market days after the debut.
The buy-back offer period is for five market days starting July 12 and will involve some RM384.8mil if all retail investors accept the offer.
“The structure is the first of its kind in Malaysia and put in place for the IPO because of the changes in the scheme that happened after the retail and non-cornerstone bumiputra investors had already invested.
“This way, the retail and non-cornerstone bumiputra investors are allowed to sell shares back to the company after the listing,” says the source.
Additionally, yesterday, Maybank Investment Bank Bhd, which is the stabilising manager for Lotte Chemical, said it might buy up to 27.77 million shares, representing 4.8% of the total number of shares offered under the IPO, to stabilise the stock’s price.
The maximum period during which it may intervene to stabilise the price of the shares is 30 days from the stock’s debut on Bursa.
No significant impact
All said and done, the entire Lotte Chemical episode is not expected to have any significant impact on the next major planned IPO here, which is that of Brunei’s largest lender, Bank Islam Brunei Darussalam, according to observers.
The bank, which has assets worth BN$9.5bil (RM29.5bil) based on 2016 audited figures, reportedly wants to raise more than RM2.1bil in proceeds.
“Despite being small in asset size, the bank commands a huge market share in Brunei. We think there will be demand for its shares,” says one observer.
Notably, the listing of both Lotte Chemical and potentially, Bank Islam Brunei, on the local bourse is a win for Malaysia, considering that both are foreign-linked entities. Malaysia is up against more mature capital markets like Singapore and Hong Kong when attracting listings.
In competitive times like these, all exchange operators are on the prowl for potential listings. It’s a given that Lotte Chemical’s debut will be closely watched by many quarters.