Why Hutch came to Singapore

Euromoney, April 2011

Records are made to be broken, but you normally have a fair idea of the candidates for breaking them. Had you laid bets a year ago on what would replace Malaysia’s Petronas Chemicals as southeast Asia’s largest ever IPO, you might have plumped for an Indonesian resources play, or a Singaporean sovereign wealth fund spin-off, or even another arm of Petronas. You’d have had a lot of guesses before you came up with a port operator that isn’t based in southeast Asia, doesn’t have a single asset there, is owned by Hong Kong’s ultimate tycoon and has opted not to list as a company at all, but a trust.

But this is the curious case of HPH Trust, the owner of about 60% of Hong Kong’s Kwai Tsing container port, Shenzhen’s Yantian container port, and a few auxiliary assets. HPH Trust is sponsored by Hutchison Ports Holdings, by some measures the world’s top port operator; that, in turn, is owned by Hutchison Whampoa, the conglomerate controlled by Li Ka-Shing – the tycoon’s tycoon, as central and iconic to Hong Kong as the Bank of China building. Yet this two-port trust of Pearl River assets raised US$5.5 billion in a listing on the Singapore Exchange in March, breaking the southeast Asian IPO record by over US$1 billion.

So what was this jewel of Hong Kong doing seeking a listing in Singapore? For the Singaporeans, this is a coup to beat all coups. Attracting foreign listings has been a mainstay of the SGX’s approach to business for years: it calls it the Asian Gateway strategy, and by the end of 2010 it had resulted in 321 non-Singaporean companies accounting for 47% of the market’s overall capitalization. In a country – no more than a city state – too small to grow much further on homegrown listings, attracting foreigners is the future. But many of them have been Chinese private sector mid-caps of variable quality; few heavyweights, beyond Jardine Matheson and Noble Group, tend to opt for Singapore. Bringing in a multi-billion dollar IPO from a foreigner, and a Hong Kong conglomerate spin-off to boot, is more than they could have hoped for.

But there is really only one reason this prized Hutch asset has made its way to a Singapore listing rather than Hong Kong, and it has nothing much to do with the rivalry between the two Asian cities, or getting out of the way of Chinese state-owned listings in Hong Kong, or even valuations. It is all about a structure called the business trust.

The business trust structure was launched in Singapore in 2006 with the world’s first shipping trusts, Pacific Shipping Trust and Rickmers Maritime. It’s sort of a cross between a company and a real estate investment trust (REIT) – and Singapore is unarguably the ex-Japan Asia leader in REITs (it has 22 of them, worth US$27 billion). The idea of it is that it allows assets such as property or infrastructure to be monetised so that they pay their income distributions out of cash flows instead of accounting profits. For a business with stable cashflows and high initial capex, like a utility or an infrastructure business, a business trust structure gives it greater freedom in how it pays dividends.

It is, from the investor perspective, a yield play. “Our market participants and investors are familiar with such yield instruments,” says Lawrence Wong, head of listings at SGX. “The tax incentives and business friendly regulations have made Singapore the choice venue for the listing of such structures.”

When business trusts first came along, they were touted as an important new line of business alongside the REITs, but the truth is that until now they have been nothing like as impressive. Wong says SGX has nine business trusts with a combined market cap of US$11.9 billion, but US$8.8 billion of that is the post-IPO market capitalization of HPH Trust itself.

Instead, several businesses have struggled under the structure, including one of the first, Rickmers, which in 2010 received a report from its parent group’s independent auditor, PricewaterhouseCoopers, questioning its ability to survive owing to its debt load. Rickmers did stay afloat, but it – and, to a lesser extent, fellow shipping trusts First Ship Lease Trust and Pacific Shipping Trust – has struggled within the business trust model precisely because of being positioned as a dividend play. On one hand they are obliged to pay out as much of their operating cash flows as possible as dividends; but that doesn’t leave much margin for debt repayment or capital management, particularly when the shipping industry itself is under pressure. Even those trusts that have not struggled have been somewhat illiquid.

So why take this structure? After all, Hutch had considered a lot of alternatives for a listing venue. Those close to the deal say that it undertook feasibility studies for a listing in Hong Kong, the US, Australia and Europe besides Singapore, declining on first choice Hong Kong precisely because it lacked this seemingly underwhelming business trust structure.

It’s true that ports are the sort of operations that business trusts are pitched at: infrastructure with steady and reasonably predictable inflows. And Canning Fok, group managing director of Hutchison Whampoa, pointed this out when asked at a pre-listing press conference in Singapore about why he had chosen this route. “Why are we listing in Singapore instead of Hong Kong? If you look at the characteristics of our assets, most of the capex has been spent in the past, and in the next five to six years there is no significant capex that needs to be spent,” he said. “The business trust is welcomed by the investment community on this aspect, because then the cash flow generated by this business can be distributed.”

But then he added something else: “These two ports are important parts of our portfolio going forward. With our business trust structure, we can aim to avoid potential hostile situations with regards to our shareholders.”

And that, more than anything, is the point.

On page 71 of the vast, 600-page-plus prospectus, one finds this. “Under the Trust Deed and the Business Trusts Act, the Trustee-Manager may only be removed by Unitholders by way of an extraordinary resolution (that is, by the approval of not less than 75% of the voting rights of all Unitholders who vote on such resolution). Accordingly, a Unitholder who owns or controls more than 50% but less than 75% of the Units and has statutory control of HPH Trust may not be able to remove the Trustee-Manager.”

In other words, you could become a majority shareholder of this thing and still not have the right to change the trustee-manager, which in this case is Hutchison Port Holdings Management, and by extension Hutchison Whampoa. And there’s no special treatment been given to Hutch here to attract this listing: this is what Singapore’s business trust rules say for anyone who uses this structure.

Approached by Euromoney, Fok confirms that this was a key consideration. “It is an integral part of our strategy,” he says. “We don’t want somebody to end up in our door asking me to step aside. It is a central part of the strategy.”

People close to the deal confirm this was the clincher. “From an issuer perspective, if you own 25% of the company there’s no hostile takeover scenario that can happen,” says one. “For an issuer who’s not looking at a straight disposal but an extension of their business, which they want to keep running, it makes a lot of sense.”

While that’s great for the issuer, it has caused some consternation among corporate governance activists. David Webb, the Hong Kong-based independent analyst and thorn in the side of many a company and regulator, came out strongly – and uncharacteristically – in Hong Kong’s corner when the listing was announced. “There’s been much hand-wringing amongst legislators and media in Hong Kong about losing out to Singapore as a choice of listing,” he says. “We don’t think Hong Kong is losing out at all, and it would be a loss if Hong Kong were to lower its standards to attract such business.”He points out that Hutch plans to retain only 25% of the listed trust – a key number given the business trust rules (the precise number it ends up with will depend on the greenshoe, and it was not clear as Euromoney went to press if this would be exercised). “If HPH retains 25% plus one unit, then HPH Trust will be bid-proof. Even if HPH is prohibited from voting, it would be an uphill struggle to get the required majority,” he says.

“Short of that, unitholders will have very little say, except on connected transactions, because they will not be able to elect directors of HPH Management, unlike a listed company. In short, the only way to change the directors of a trustee-manager is to own the trustee-manager.” He also points out that under the structure of the deal, although Hutch’s interest in HPH will be reduced to 25%, it will still retain 100% of its operations and receive fee income for doing so. “Nice work if you can get it.”

“We can see no good reason for Hong Kong to emulate Singapore business trusts,” concludes Webb. “There’s no tax reason for doing so, and there are governance reasons why we shouldn’t. We should not race to the bottom just to win business from tycoons who are not willing to work with existing corporate governance standards.”

Hutch and its bookrunners take a different stance: that HPH works best with Hutch involved, so anything that blocks a potential takeover is good for investors rather than bad. “The company needs good management,” Fok tells Euromoney. “To raise this kind of money around the world, it can only be delivered, the business plan, with the support of HPH. That is very important. With the kind of shareholdings we have, 25%, we can deliver the result to the shareholders and the management is a crucial part of it.”

Bookrunners also say this didn’t turn up as much of an issue on the roadshow. “Investors are not concerned,” says Eng-Kwok Seat Moey, managing director and head of asset-backed structured products at DBS Bank. “In fact, investors view it as a sign of the sponsor’s commitment and see it as an alignment of interests. They would like the sponsor to provide continuity through managing the assets. For REITs , the sponsors’ stake is on the average about 30%.”

If Webb’s concerns were shared by institutional investors, it wasn’t immediately apparent as the three bookrunners – DBS, Deutsche Bank and Goldman Sachs – hit the road pre-marketing in pursuit of cornerstone investors. By the time the deal launched, they were able to announce eight cornerstones taking up US$1.62 billion of the deal. That would prove a vital anchor and vote of confidence in getting the rest of the deal away in record time.

The eight – Ally Holding, Aranda Investments, Capital Research and Management, Cathay Life Insurance, Lone Pine Capital, Metropolitan Financial Services, Paulson & Co and Seacrest FIR – make for a curious combination. On one hand there is some suitably steady or Singapore-linked money: Aranda, in for US$100 million, is owned by Temasek, the Singapore sovereign wealth fund; Cathay Life, from Taiwan and up for US$100 million too, is a natural holder of a yield-producing infrastructure asset. Capital Research, the biggest buyer with US$634 million, is also a natural holder. But Paulson & Co is John Paulson’s vehicle: a multi-strategy event arbitrage investor (a hedge fund manager, in other words). And at US$350 million, he made the second-biggest commitment of all the cornerstones. Lone Pine Capital, too, is not an obvious candidate; founded by Steven Mandel, it is also seen as a hedge fund group (it put in US$186 million). Ally and Seacrest are BVI companies, in Seacrest’s case representing Jenkin Hui, a Jardine Matheson director who runs Pointpiper Investments; and Metropolitan represents “various reputable individuals from the South-East Asia region” with “substantial stakes in both private and public companies in the natural resources sector,” according to the prospectus.

Those close to the deal say the diversity was intentional. “We were very selective in our cornerstones,” one says. “We wanted a wide range: long funds, hedge funds to provide liquidity, and also the family, high net worth investors.”

This eclectic gathering would represent 30% of the total deal. The rest of the deal was structured in four parts: a global offering, a public offering without listing (POWL) in Japan led by Daiwa and Mizuho Securities (the global offering plus the POWL eventually made up 88% of the base offer, cornerstones excepted), a Singapore public offering (just 3.4% of the deal) and a preferential offering to Hutchison Whampoa shareholders (8.6%). There were two roadshow teams, one led by Fok and the other by long-standing Hutchison Whampoa CFO Frank Sixt, in both cases alongside members of the Hutch Ports team.

The strength of the anchor book meant that when the roadshows started, they were able to get what they needed and stop pitching a day earlier than expected; this would prove crucial when the POWL in Japan ended on the morning of Friday, March 11, just hours before the earthquake and tsunami wrecked the country’s northeast.

Those who saw the roadshows say that governance issues rarely came up: questions focused much more on the growth profile of the ports, the ability to sustain cashflows, and on gearing. Fok says the global offer part, including the institutional book bar the cornerstones, was three times covered. Still, some institutions stayed away, fearing an operator as canny is Li Ka-Shing was selling his assets for top dollar at the top of emerging market buoyancy. “We let that one go through to the keeper,” says one fund manager. “A bit expensive, with other listed options more attractive.” In the end the deal priced in the middle of a US$0.91 to US$1.08 range, settling at US$1.01 per unit.

Business trust structures aside, there were some other reasons for the Singapore listing too. Hutchison Ports Holdings (the company not the trust) features PSA International, the Singapore state-owned port operator, as a 20% shareholder; PSA has bought assets from Hutch before.  Also, Singapore offers a tax break for trustee managers in offshore infrastructure: 10% for the first 10 years, assuming HPH Trust is deemed to qualify.

And there’s no denying that these are good and well-positioned businesses. Yantian is a play on Chinese export strength; Hong Kong, while clearly more mature, has become a regional transhipment hub. “Despite the global financial crisis, both assets achieved record throughput in 2010, both exceeding 10 million TEU each,” says Ivor Chow, CFO of the trustee-manager. He says growth over the last 10 to 15 years has been 10 to 15%, and that in future it is realistic to expect 8-10% throughput growth, driven not just by Chinese export growth but imports too, for which the trust owns the longest berths and largest yards with deepwater access in the region. “We have very long-term relationships with our customers with some spanning over 30 years,” Chow adds. Investors will go into the deal with an expected yield of 5.9%.

But it’s hard to shake the sense that HPH represented a great deal for Singapore, and a great deal for Hutch, without quite the same certainty that it will be a great deal for investors. Singapore gets a landmark upon which to base a whole new push for overseas infrastructure assets. Hutch gets a lot of money to pay down debt and invest in more ports. Investors get a play on Chinese exports, decent yield – and an unproven structure from which its managers could not be removed with gelignite. Time will tell if that’s a smart call.

Box: The big moment

Having won such a trophy, Singapore paraded it with pride. On the day HPH Trust began trading, March 18, newspapers – international as well as local – carried two full pages of ads apiece using the listing to promote Singapore as the “home of infrastructure companies tapping into Asian liquidity.” And the moment of listing was set at 2pm, the start of the afternoon session, rather than the morning bell in order to accommodate maximum participation at the listing ceremony.

These ceremonies come and go regularly at SGX on the second-floor foyer of the exchange’s Shenton Way building, but this attracted a particularly senior crowd. Ho Ching, chief executive of sovereign wealth fund Temasek, was there to greet the great and the good of the Hutch empire including Canning Fok, Frank Sixt and a host of executives from the port business and the new trust. Singapore Exchange had its top brass out: chairman Chew Choon Seng, president Gan Seow Ann, listings head Lawrence Wong – in fact everyone bar CEO Magnus Bocker, no doubt embroiled in SGX’s continuing tilt for the Australian Securities Exchange.

A screen had been erected behind the stage showing the bid and ask prices ahead of commencement of trading; in front of it, as the big moment approached, Chew and Fok made speeches. An SGX spokeswoman announced there would be a 10-second countdown to the start of trading. Then she started counting down to the countdown. It began to feel like a Space Shuttle Launch.

The crowd – and it was quite a crowd – obediently counted down to 1.59pm whereupon Fok, Chew and HPH group managing director John Meredith started hammering at a gong with mallets, a swirl of gold confetti filled the air and two dragons commenced a lion dance to a clash of cymbals. It was a perfect moment: except for the fact that, at that moment, on the big screens behind this exuberant melee, the stock opened 4% down on its listing price.

Nobody seemed to be looking in that direction.