Breakingviews: Pulled pork IPO a strategic retreat

Chinese pork producer WH Group's decision to scrap its listing plans may have created red faces all around, but Breakingviews' Peter Thal Larsen explains why it's the best of the firm's bad options.

Published

3 months ago

Categories

Finance

Topics

Finance

People

Tara Joseph, Peter Thal Larsen

Places

China, United States of America

Transcript

(SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "Pulled pork of an IPO, Peter. WH Group pulls its IPO that it halved last week in terms of value here in Hong Kong." (SOUNDBITE) (ENGLISH) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "Yeah that's right. It's really a bit of an embarrassing situation for WH Group. But actually, we at Breakingviews think they've done the least bad thing in the circumstances. This IPO was in real trouble. Investors were unhappy with the valuation that WH Group, which is a sort of an amalgamation of a Chinese pork company which then last year bought Smithfield, a U.S. pork company. They were trying to re-list the whole thing in Hong Kong. And investors really weren't happy with the valuation that they were getting, they were asking for this business. And so, WH Group had sort of responded by trying to do things like shrink the size of the offering, but crucially what they hadn't done was lower the price. And so, actually cancelling the IPO, even though it's embarrassing, allows them to go away, take a bit of time to integrate these two businesses a bit more, and hopefully come back with a slightly more compelling story and possibly at a better valuation for investors." (SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "So this little piggy isn't going to market after all. But can it actually come back with a new valuation and investors will buy into it? It seems like it's kind of tainted the waters here." (SOUNDBITE) (ENGLISH) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "Well it's definitely tainted the waters, and when you think this company had already done various things like changed its name to try and, sort of, present itself in a new light, so there's definitely going to have to be a bit of a rethink. But, the fundamental problem here was that you had what was essentially a Chinese business, which is already partially listed in China, controlled by private equity groups, which had gone out and made a big leverage bid for this company, Smithfield, in the U.S. And it then put the two together -- you know, they only bought this business seven, eight months ago -- they put the two together and tried to re-list them. And the way the valuations stacked up they were basically asking a price that was at least 21 percent higher for Smithfield than they paid last year. And investors just looked at that and said, 'well you haven't really integrated these two businesses. You haven't added any value to it. And yes, we can understand the logic that says that you should be able to sell more U.S. pork in China and that demand is growing and people in China want to eat more foreign foods.' But when you put it all together the valuation was really too demanding, a little bit too greedy possibly for what the underlying fundamentals were telling us." (SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "That is just the point Peter. It sounds like in the end, it really was a tale of greed amongst the private equity investors, the bankers. Can they actually go back and reformat it?" (SOUNDBITE) (ENGLISH) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "Well there's a lot of red faces here…" (SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "Yeah" (SOUNDBITE) (ENGLISH) ASIA EDITOR, REUTERS BREAKINGVIEWS, PETER THAL LARSEN, SAYING: "The private equity investors obviously are one. They hired 29 banks, which in itself was a record, to do this IPO and still they couldn't get this 1.3 billion dollar offering, it was in the end, away. So, it's definitely going to require a rethink, and they are going to have to come back and be a bit more humble and probably a bit less demanding on the valuation in order to try to get this IPO away in the future. But we think in the circumstances it's better to go away for a bit and come back at some point in the future than to have pushed ahead with what was clearly going to be a very unpopular and unappetizing IPO." (SOUNDBITE) (ENGLISH) REUTERS REPORTER, TARA JOSEPH, SAYING: "Unappetizing IPO shelved by WH Group, will they come back with smarter valuations?" ENDS