WH Group, the world's biggest pork company, is slashing its proposed Hong Kong IPO and delaying the pricing to next week, sources with direct knowledge of the matter said on Tuesday, as market volatility and rich valuations turned investors off the deal.
Its initial plan had called for an offering of up to $5.3 billion, in what would have been the island city's biggest listing in four years. But Reuters calculations based on information from a source familiar with the revised plan show the deal is now expected to garner less than $2 billion.
WH Group said in a statement on Wednesday that it may reduce the size of the IPO but did not give reasons for the possible move. It added that if it did, it would publish a supplementary prospectus, resulting in a short delay to its original timetable.
It also warned that if conditions for the deal laid out in prospectus, which includes conditions related to pricing, were not met, the IPO could lapse. The downsizing caps a string of difficulties for the deal and is an embarrassing setback for the Chinese company that bounded onto the international stage last year with its $4.9 billion purchase of U.S.-based Smithfield Foods. It plans to use much of the funds raised in the IPO to pay back debt incurred in that acquisition.
Shareholders in WH Group who had hoped to partly cash out of their investments, such as China private equity firm CDH Group, Singapore sovereign wealth fund Temasek Holdings and Goldman Sachs Group, will now no longer do so under the revised plan, the sources added.
In addition to existing shareholders not selling their shares, WH Group will also sell fewer new shares than initially planned, IFR, a Thomson Reuters publication, reported, citing sources close to the company.
A separate source told Reuters that the revised offering would be equivalent to 10 percent of its enlarged share capital.
That would represent about 1.3 billion new shares, based on WH Group's 11.69 billion existing shares. At the top of the company's indicative range of HK$8.00 to HK$11.25 per share, the revised IPO could be valued at up to $1.9 billion, Reuters calculations showed.
The company "plans to review the structure of the IPO because of the continued volatile market," the source said. Hong Kong's Hang Seng Index has lost ground since the beginning of the year, falling as much as 9 percent in late March. It is currently down 2.6 percent for the year to date.
Sources declined to be identified as they were not authorised to speak to the media.
Final pricing had been originally been slated for Tuesday, with the company due to debut on the Hong Kong stock exchange on April 30.
The deal got off to a rocky start, failing to attract any cornerstone investors who usually anchor most IPO deals in Asia, receiving a guaranteed allocation in exchange for agreeing to retain their stakes for a set period.
An unusually wide indicative price range was then set, a range that bookbuilding sources attributed to volatile markets but which also suggested that valuing the company was difficult.
A record 29 banks working on the deal created another level of confusion for fund managers, while a near $600 million share award to WH Group's CEO and another executive in charge of its mergers and acquisitions raised questions about corporate governance.
The IPO also came just seven months after the Smithfield acquisition, not much time to show investors how successful it was in integrating the business.
The top end of the IPO price range gave the Smithfield business an implied valuation if $13.5 billion, almost double what WH Group paid last year, calculations by Breakingviews, a Thomson Reuters publication, showed.
A Hong Kong-based hedge fund manager said WH Group had sought to playing an arbitrage game.
"They bought Smithfield at a lower valuation than the IPO valuation and then now they are turning to Hong Kong and using a higher multiple," he said. Under its initial plan, the company had offered 2.92 billion new shares, while some of its shareholders offered 731 million existing shares.
CDH, one of China's biggest and oldest private equity firms, had offered the biggest chunk among selling shareholders with a stake worth up to nearly $660 million. The second biggest sale was from shareholder Ample Colour Ltd, which planned to offload its entire holdings worth up to $136 million after buying them from Goldman Sachs less than five months ago.
Goldman Sachs itself was set to raise as much as $71 million from reducing its stake in WH Group, while Temasek had offered up to $58.3 million of shares.