Issuer: Mass Transit Railway Corporation
Deal: privatization
IPO Amount: HK$10.8 billion
Date: October 1 2000
Global co-ordinators: Goldman Sachs, HSBC, UBS Warburg
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Simpson: a lot of work
to create momentum | When Hong Kong’s government went ahead with its first privatization it needed the deal to be perfect. And so it was.
The IPO of underground railway operator Mass Transit Railway Corporation was hugely oversubscribed and that at a time of dismal market conditions – the Hang Seng index had lost 20% since July.
But MTRC’s new shares markedly outperformed the Hang Seng index. In the first three months of its public life the company traded up 50% from an initial share price of HK$9.38, and was one of the best performers on the Hang Seng.
The lead co-ordinators set other impressive standards, which will help turn future privatizations into similar success stories. With MTRC they have established an IPO infrastructure including the use of TV and newspaper advertising, which was not allowed for IPOs in Hong Kong before, an online application process, and an online IPO prospectus that came in addition to an old-style, telephone-book-sized prospectus.
This IPO also set a precedent on how to get strong support from both institutional and retail investors. The government made it clear back in March 1999 that MTRC, one of Hong Kong’s crown jewels, should be returned to the taxpayers. So the leads set out with an initial institutional/retail ratio of 80:20 – but found themselves overwhelmed by applications from nearly 10% of Hong Kong’s population – over 600,000 people.
They knew what they wanted: MTRC runs trains that are not only safe but also arrive on time 99 times out of 100. And as if this was not enough, MTRC actually makes money. “This is a company with an incredible track record of operating profits – which stands comfortably apart from the basket-case companies in Europe,” says one observer.
The leads also dished out some other delicacies to convince individuals of the shares’ excellent value. Retail investors were given a 5.25% upfront discount to the institutional offer price of HK$9.38, as well as extra loyalty bonus shares (one in 20 after one year and one in 15 after two years). Doubters might have finally been convinced by the retail price of HK$8.88 – a lucky number for the Chinese.
At the time of issuance, 60% of the shares were sold to the public, though this figure boiled down to 50% after the exercise of the greenshoe that only applies to institutional investors. Still, the absolute amount raised the proportion of Hong Kong’s population holding shares to a startling 40%.
And despite the huge retail demand, the crowding problems seen at tom.com’s IPO (with “only” 400,000 applications) were avoided by a careful operational set-up that included the use of HSBC’s extensive branch network, and online applications, which attracted 79,000 investors. This was the first eIPO in Hong Kong – again initiated by the government’s wish to make MTRC a springboard for more eIPOs in the future.
“The operations for retail investors were very demanding,” says John Simpson, head of equity capital markets at HSBC. “We’ve set up websites, we were using a unique settlement system, and there was a lot of work to do to create the needed momentum.”
Arguably, selling a company to individuals who know and understand it is not that much of a challenge but rival bankers had to concede that its after-market performance was an achievement given that investors don’t buy into much of a growth story.
MTRC is in fact a highly defensive play, a mix between utility and property – the latter coming from its ownership of the land above its tracks. This defensive, low-risk image was a stroke of luck. “At that time, investors were screaming for a safe haven,” says Brown. “The comeback of the old economy was evident.”
But Simpson at HSBC points out that MTRC’s performance has not been matched by other old-economy plays. He ascribes this to the fact that MTRC was very much a retail-driven deal. “MTRC’s offering proves that, if structured properly, a deal can attract enough participation from a more stable, buy-and-hold retail investor base,” he says. “It provides a model of how things could be done in future IPOs. Traditional IPOs that have not actively solicited retail demand could learn from it.”
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