Hong Kong in Fashion, beware IPO tourism

The success of Prada and Samsonite in raising funds in Hong Kong has attracted the attention of other firms in Europe and the US that assume Asian investors will buy anything -- and even pay a premium.However, a closer look shows that pure exchange tourism will fail.

The Italian fashion house Prada completed its HK$16.7 billion (1.3 billion pound) Hong Kong IPO last week despite a slump in market conditions that left the retail portion of the deal well undersubscribed.

Prada's successful listing came after it had repeatedly tried and failed to list in Europe over a 10-year period, and proved that foreign companies can achieve a premium valuation on Hong Kong's bourse.

The final price put Prada at premium of about 20 percent to Burberry and LVMH, providing a big boost to the Hong Kong exchange's hopes of luring more international issuers.Together with the $1.25 billion listing of US luggage maker Samsonite International, Prada's IPO has driven international interest in Hong Kong listings to fever-pitch.

Football club Manchester United is the latest household name to be linked with plans to float in the city. Bankers, however, poured cold water on the idea that many other global brands would be able to follow in Prada's footsteps.

"There is still room for foreign listings in Hong Kong, provided there is a clear, well-articulated strategic alignment of the business in Asia -- which will get them institutional support," said one banker. "The ones that come to Hong Kong only for better pricing valuations with no Asian business rationale are better off staying at home."

"There has to be a clear Asian strategy and the pricing should be reasonable to ensure strong, broad-based support for the IPO," said another banker. "If even one of these boxes is not ticked, you are looking at a struggle."

"These are two deals that attracted solid institutional order books but they still did not manage to get a huge retail investor interest, which was a consequence of jittery sentiment at the moment," said a third observer.

ASIAN PRESENCE

Appetite for these deals has been dented by weaker overall market sentiment as investors react to continuing global economic uncertainty, worries about Chinese monetary tightening and European sovereign defaults.

But, more importantly, Hong Kong investors have shown they are reluctant to support companies involved in exchange shopping that come to the city because they believe local investors will pay more for the same asset than in their home nations.The rationale is not new, but in tough markets companies are being held to a higher standard.

Rusal, the first Russian company to list in Hong Kong, struggled to attract investors and plunged after its listing in January 2010. More recently, Australian miner Resourcehouse cancelled its Hong Kong IPO after a dismal response from investors.

Bankers argued that Prada and Samsonite were at home in Hong Kong. Samsonite is notionally a US firm and last planned an IPO in London, yet 42 percent of its revenues come from Asia-Pacific -- much of this from Japan -- while the US and Europe lag behind.Prada, though successful in attracting institutional money, put retail buyers off with a valuation that was perceived to be expensive in comparison with its peers.

Prada launched its 423.3 million shares (14 percent primary and 86 percent secondary) IPO with an indicative price range of HK$36.50--HK$48.00 per share that represented a 2011 P/E of 21-27.7 times.

Among Prada's peers, British luxury goods group Burberry trades at 21.5 times forecast 2011 earnings, while LVMH, the owner of Louis Vuitton and Fendi, changes hands at 17 times, according to a pre-deal research report by Goldman Sachs, joint global co-ordinator on Prada's listing.

A 12.5 percent Italian tax on capital gains from the sale of the shares was another deterrent. Investors will also be subject to a withholding tax of 27 percent on dividends, as required by Italian law.Fund managers still jumped into the deal, leaving the institutional book several times covered, but retail investors were less enthused and that portion was only half covered.

The worsening market condition pushed Prada to tighten its price range to HK$39.50-HK$42.25, the middle to low end of the original range, in the last day of bookbuilding on June 16. Many hedge funds pulled out of the deal in the last two days of bookbuilding, said a source close to the transaction.

To ensure the shares went to the right investors, Prada finally priced the deal at the bottom of the tightened range, or at a 2011 P/E of 22.8 times, to raise HK$16.7 billion, even though sources claimed the book was still oversubscribed at the top of final guidance. About 80% of the deal was allocated to high-quality, long-only funds.

US luggage maker Samsonite International had a similar dynamic, setting pricing slightly below the mid-point of the range and ending with a strong institutional book, but a retail tranche only modestly oversubscribed.

FANTASY FOOTBALL

Even at the more mellow valuations, bad markets are conspiring to ensure listing debuts are poor, further alienating investor interest in foreign listings.

Samsonite fell as much as 11 percent in early trading on June 16, ending the day at HK$13.38, or 7.73 percent below the issue price. Prada debuts on June 24.Among the names being mentioned is football club Manchester United, which is mulling a Hong Kong IPO of up to US$1bn, while Formula One Group is also seen as a candidate.

The common theme behind both names is the well-recognised brand image and a strong Asian following for the respective sports pursued by the two companies."That could be enough to attract an investor following but it all depends on whether investors will think with their hearts or their heads, especially in these distressed markets," said one banker.

One global head of ECM said that Manchester United was an example of a company that would be rejected by investors as its revenues were domestic and institutional investors would not be interested in purchasing a vanity share."Manchester United has lots of fans in Asia, but how many of them are wearing authentic shirts?" he said.

Source = stv.tv