The WH Group’s chopped initial public offering still looks unappetizing.
The Chinese pork producer is slashing the size of its Hong Kong fund-raising to as little as $1.3 billion from a previous target of at least $3 billion. But its reluctance to accept a lower price means the I.P.O. remains a tough sell.
The company, formerly known as Shuanghui, is sticking with its original plan to offer new shares at the indicated range of 8 to 11.75 Hong Kong dollars each. Even at the low end, that values its American business, Smithfield, at 21 percent more than the $7.1 billion the Chinese group paid barely eight months ago, according to an analysis by Reuters Breakingviews.
That full-fat price is on top of the 31 percent premium the WH Group paid to take control of Smithfield. The enlarged company claims that it can add value to Smithfield by selling more low-cost United States pork to Chinese consumers. Yet large institutional investors appear unwilling to pay for value that they can’t yet see.
A better plan would be to press ahead with the original offering but at a lower share price. That would allow the group to raise more cash to pay down some of the $7.1 billion of net debt left over from the Smithfield deal.
Yet adjusting the price range is highly unusual for companies listing in Hong Kong, and would have delayed the I.P.O. Another option would be to postpone the offering until synergies from the Smithfield deal materialize, though that would leave the WH Group saddled with more debt for longer.
A scaled-back offering at the original price range doesn’t address concerns about the group’s valuation, and does little to reduce its leverage. It also creates a potential stock overhang: The Chinese private equity firms CDH Investments and New Horizon, which together own 40.5 percent of the company, will no longer sell any shares in the offering. That is bound to weigh on the WH Group’s shares after the listing, and the decision to stick to its valuation could leave it in the pigsty.
Una Galani is the Asia corporate finance columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.