29 investment banks, one failed US$6 billion IPO: Who is to blame?
Mainland pork producer says the record 29 bookrunners to blame for collapse of share offering because of poor communications
Ray Chan, George Chen and Nick Edwards
Recriminations are flying between investment banks after a record 29 of them failed to avert the collapse of a US$6 billion deal to sell shares in Sino-US pork producer WH Group.
A meeting yesterday of senior executives at WH - formed when Shuanghui, the mainland's top meat producer, bought out US pork supplier Smithfield Foods in a landmark US$4.7 billion deal last year - blamed poor communications between the banks for the deal's demise, according to a source with knowledge of the meeting.
"The banks should have done a better job. Unfortunately, some of them were too confident, and even a bit arrogant, when they tried to price the deal and co-ordinate with each other," said the source, who declined to be identified as the meeting's discussions were confidential.
BOC International, Morgan Stanley and UBS headed the huge roster of institutions marketing the share offering that finally failed about three weeks after it was launched and just days after the offer price and size were slashed in a bid to save it.
Orders were secured for fewer than a third of the US$1.9 billion worth of shares that were eventually being put up for sale, according to market sources.
WH chairman Wan Long had high hopes that Morgan Stanley would be able to repeat the success it had on last year's Smithfield takeover deal - on which it was the sole adviser - which was widely regarded as one of the most successful of the year.
"Morgan Stanley is inevitably the bank to take the responsibility given its senior status among the underwriters," said one of the bankers involved in the deal.
Other market players, however, said the sheer number of participants meant the deal struggled from the outset.
"The way the deal was marketed was plainly wrong," said Philippe Espinasse, a noted market analyst and author and former head of equity markets for Asia at investment banks Macquarie and Nomura.
Espinasse said having a record 29 bookrunners was "ridiculous for a US$6 billion deal".
Timing and pricing also worked against it.
An unwavering demand for a top-price valuation on the sale from WH's management and its private equity backers meant that any fall in share prices during the roadshow would leave potential buyers of new shares sitting on losses.
"There wasn't much room for error with a deal priced at 15 times earnings," said one of the deal's senior bankers.
The Hang Seng Index dropped 4.5 per cent between the deal's formal launch on April 10 and its eventual withdrawal on April 29. The H-share index fared worse, with a loss of 6.2 per cent.
But at least five syndicate bankers on the deal told the South China Morning Post that the senior underwriters had started with a price in excess of market averages despite weak sentiment for new share offerings.
"The market is not good but it is also not too bad to take a billion-dollar IPO," said one of the sources.
Wan is expected to relaunch the share sale next year but with just four or five investment banks handling the offering.