AgBank’s Market Debut
AgBank’s $19.3 billion IPO may or may not go down as the largest initial public offering in history. That distinction currently belongs to Industrial and Commercial Bank of China (ICBC), which raised $21.9 billion in its 2006 market debut.
Largest IPO on record or not, the AgBank offering stirred up quite a bit of interest around the world. Its sheer size and the continuing interest in all things China guaranteed widespread news coverage.
Pamela Ritchie and Martin Baccardax, hosts of Canada’s BNN “After Hours” business broadcast, wanted to discuss the offering, as well as a number of topics regarding China, and I obliged in a 15-minute live interview from Beijing. Apart from the fact that the interview was conducted at 5:30 on Saturday morning, a five-second delay as the satellite signal was bounced from Beijing to London and then on to Toronto made it particularly challenging.
Whether AgBank breaks that record will depend upon whether underwriters decide to exercise the over-allotment, or “green shoe” option as we used to call it on Wall Street. The green shoe option, which is one of the terms agreed upon between the company and its underwriters before an offering, requires the company to issue more shares if the underwriters decide that these additional shares are needed to manage investor demand. The term comes from the Green Shoe Manufacturing Co., the maker of Wellington boots that was founded in 1919 and is now known as Stride Rite Corp., which was the first company to permit underwriters to use this practice.
In order to ensure a strong market reception for an IPO, underwriters typically oversell a new issue of common stock, deliberately creating more demand among investors for the securities than there is supply. That is why a company’s newly issued shares often go to 50, 60 or 70 percent premiums when they begin trading. Investors who could not get enough shares from the underwriters bid the price up when they try to meet their needs through open market purchases. If demand is sufficiently strong, the underwriters typically have the option, for a certain period of time, to require the company to issue up to 15 percent more shares than provided for by the offering at the IPO price. Underwriters like to exercise the green shoe option if at all possible because it means more fees.
If the underwriters exercise the green shoe option in the case of AgBank, the additional $3.0 billion or so of proceeds would enable AgBank to top ICBC’s record capital raise. If not, Agbank will have to settle for second place.
AgBank could not have picked a worse time to come to market. The China market is down 25 percent this year; the China economy is slowing; there are troubles in Europe and the economic recovery in the United States appears to be losing steam. On Friday, when AgBank’s shares began trading in Hong Kong, the Dow Jones plummeted by 261 points. Against this backdrop of negative market sentiment, AgBank’s shares only rose to modest premiums of 1 to 2 percent when they began trading in Shanghai and Hong Kong late last week. Given this weak demand, it is increasingly unlikely that the underwriters will get to earn those additional fees.