Weak Appetite Kills WH Group IPO
I’ve been writing for much of the last 3 weeks about the rapidly fading appetite for Chinese IPOs among western investors, and the latest reports that pork producer WH Group has scrapped its plans for a Hong Kong listing certainly seem to add to the gloom. But I should add that this particular case is slightly different from the many weak performances we’ve seen these last 2 weeks, as it comes in the food space and mostly involves the re-listing of a recently aquired US asset that was already performing poorly.
The story of WH Group is largely one of repackaging, which seems appropriate for a company from the food sector. But WH Group is quickly discovering that the old adage “You can’t make a silk pursue out of a sow’s ear” is appropriate here, and that western investors aren’t being fooled by its latest efforts to repackage an old asset and market it as a hot Chinese IPO.
Before we look at the latest reports that WH Group has scrapped its IPO, it’s helpful to backtrack and review the chain of events that led to this latest development. The story began nearly a year ago, when the relatively unknown Shuanghui, one of China’s largest meat processors, made a bold and risky $4.7 billion bid for Smithfield, the largest US pork producer. That deal drew criticism from some US politicians due to food security concerns, but was ultimately approved by Washington in September.
During the approval process, word leaked out that Shuanghui was considering a Hong Kong IPO after the deal closed, seeking to raise up to $4 billion to help fund the purchase. (previous post) Shortly after the deal closed, Shuanghui also changed its name to WH Group, in a bid to sound more international.
The newly named WH Group moved ahead with its Hong Kong listing plan, with reports back in March indicating it was aiming to raise up to $6 billion through the offering. But this month it cut the size to just under $2 billion after meeting with weak investor appetite. Even that wasn’t enough, and now media are reporting WH has shelved the deal completely until market conditions improve. (English article)
Market watchers are citing a number of reasons for the IPO’s failure, including the facts that WH Group hired a record 29 investment banks to underwrite the deal and that it was seeking too high a price. But from my perspective, the failure owes mostly to WH’s flawed logic that western investors would gobble up a repackaged Smithfield, which was struggling before last year’s mega merger.
Some quick analysis will show there’s quite a bit of repackaging here. Smithfield is still the largest part of WH Group’s business, meaning the overall company’s growth prospects are still weak. Obviously the addition of the China growth story makes the product slightly more attractive, though even that element isn’t so strong due to the nation’s slowing economy. Lastly there’s the name change from Shuanghui to WH Group, which didn’t fool anyone.
Observers are probably asking what this IPO failure means more broadly for new overseas listings by Chinese firms, which have met with turbulence in the last few weeks after a brief surge late last year. I’ve said before that the current window of positive sentiment should persist through the first half of this year, and would say that forecast is still valid. At the end of the day, the broader fading sentiment was almost certainly a factor behind WH Group’s failure; but the main credit for the deal’s collapse should really go to WH Group’s flawed assumption that it could successfully repackage Smithfield into an exciting new China play with strong growth potential.
Bottom line: WH Group’s scrapping of its Hong Kong IPO is only partly due to weakening market sentiment towards Chinese new listings, and owes more to lack of interest in this individual company.
Related posts:
