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Lost in translation? A close look at Japanese POWLs

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HONG KONG (Dow Jones Investment Banker) – Public offerings without listing (POWLs) have for a decade been used to channel Japanese retail financial assets – about half of which are held in the form of cash in bank or post office deposits – towards international primary equity offerings. But do POWLs as they stand really add value to new issues?

In Asia, the first large-scale POWL was introduced at the time of Korea Telecom’s US$2.2 billion privatization in mid-2001. Since then POWLs have been used in seven of the 10 largest IPOs in Hong Kong. The practice steadily increased to a peak of 15 offerings in 2005, generating demand that year of almost US$47 billion equivalent, before they tapered off during the sub-prime debacle.

POWLs have begun to surface again in large deals. The multi-billion dollar IPOs of AIA Group and Agricultural Bank of China Ltd. in Hong Kong in 2010 both included Japanese offerings, as did GIC’s IPO of Global Logistic Properties in Singapore that same year. And Hutchison Whampoa has just appointed banks to lead a POWL in the proposed IPO of up to US$6.4 billion for port operator Hutchison Port Holdings (HPH Trust) in Singapore.

POWLs are generally seen as a form of insurance by issuers and international bookrunners, to canvass additional demand and gain momentum in what can be challenging market conditions. The reality, however, is that they are most of the time only possible in offerings by large, prestigious issuers – transactions that are, by their very nature, likely to be blow-out deals.

As is common in domestic IPOs in Japan, demand for POWLs comes almost entirely from retail investors–in practice, household and high net worth investor accounts managed by Nomura, Daiwa, Nikko or Mizuho. Hence, these offerings involve significant marketing logistics, as well as the filing of a Japanese-style prospectus or securities registration statement (SRS) with the Ministry of Finance. Drafting the SRS adds several weeks to a standard international IPO timetable and work on a company’s accounts by Japanese auditors. There are also ongoing disclosure requirements in Japan after the offering.

It’s seldom noted, but POWLs are fixed-price offerings. The subscription phase is conducted on an underwritten basis over a three-day period once the offer price has been determined. While marketing precedes the formal offer period, and indications of demand can be collected by the lead banks at that stage, it’s debatable whether the process influences the overall institutional bookbuilding process and pricing of an IPO.

Also controversial is the fact that POWL tranches remain relatively modest in size, in spite of the very high amount of demand they can generate. AIA’s US$20.4 billion IPO is a case in point. The POWL was scaled back to only US$400 million, even though Japanese demand reportedly totaled US$5.5 billion. Because the lead managers for POWLs are most of the time not appointed in a bookrunner capacity for the main offering, they have no say in the global allocation process of an IPO or follow-on transaction. This is compounded by the recent trend to appoint two, rather than a single, POWL coordinator, as was the case in the flotation of AIA (Daiwa and Nomura) and will be with the HPH Trust IPO (Daiwa and Mizuho).

Given the continuing low interest rate environment in Japan and the IPO buzz in the rest of Asia, POWLs are likely to remain a feature of the larger ECM offerings in the region. In their current form, however, whether they actually do much for issuers and selling shareholders is an open question.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at http://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email djinvesmentbankereditors@dowjones.com.)

[This article was originally published on Dow Jones Investment Banker on 2 March 2011 and is reproduced with permission].

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