By Elzio Barreto
HONG KONG (Reuters) - China's WH Group Ltd, the world's biggest pork company, has launched a Hong Kong initial public offering of as much as $5.3 billion in the second-largest ever IPO by a food and beverage company.
The IPO is coming at a time when Hong Kong's stock market has been hit by volatility arising from concerns about political tensions in Russia, slower growth in China and when the U.S. Federal Reserve may raise borrowing costs.
In view of the market conditions, WH Group and some of its shareholders are offering shares in a relatively wide range of HK$8.00 to HK$11.25 each. A total of 3.65 billion new and existing shares will be offered, putting the deal at up to HK$41.06 billion ($5.3 billion), according to a term sheet seen by Reuters on Thursday.
WH Group, whose products include Smithfield ham, Carando pepperoni and Farmland bacon in the United States, has been pre-marketing the IPO since last week. It plans to use some of the proceeds to pay down debt it took as part of its $4.9 billion takeover of U.S.-based Smithfield Foods Inc last year, people familiar with the plans have said.
The group has "a good anchor book", though it has signed no cornerstone investors due to volatile global markets, a source familiar with the deal said, declining to be identified because details of the IPO process have not been publicly disclosed.
Typically, a deal the size of WH Group's would tap cornerstones, which receive a guaranteed allocation in exchange for agreeing to retain their stakes for a set period.
"Volatility is part of the reason," added the source.
Though Hong Kong's shares are trading at their 11-week highs, the benchmark stock index <.HSI> is down about 2.3 percent so far in 2014, bouncing between gains and losses of more than 7 percent along the year.
Shares of small Chinese pork producer Huisheng International Holdings Ltd <1340.HK> have fallen 14.6 percent since their debut in Hong Kong on February 28. Its tiny $32 million IPO, which was swamped by a horde of mom and pop investors, was seen as one gauge for investor demand for consumer stocks.
The WH Group listing would be the world's second-biggest ever food and beverage IPO after Kraft Food Inc's $8.7 billion deal in June 2001. It would also be the largest new listing in the Asia-Pacific since AIA Group Ltd <1299.HK> raised $20.5 billion in October 2010.
WH Group could increase the size of the IPO to $6.11 billion if underwriters exercise a greenshoe option to meet additional demand.
Pricing for the IPO is slated for April 22, with the shares making their debut on the Hong Kong stock exchange on April 30.
To draw investors to its IPO, WH Group is banking on the growth potential of Chinese demand for pork and processed meat. The takeover of Smithfield will help WH Group's Chairman and CEO Wan Long, known as China's "Chief Butcher," secure a steady supply of pork to meet the expected demand growth at home, people in the industry have said.
WH Group's history dates back to 1958, when it started operating as Luohe Cold Storage to process and store perishables in Luohe, in China's central Henan province.
The group listed its Henan Shuanghui Investment & Development Co Ltd <000895.SZ> unit in December 1998 in Shenzhen and owned 73.3 percent of the unit as of December 2013, with the remainder of the shares trading publicly.
The group's acquisition of Smithfield, completed in September last year, would help secure supplies to China, where WH Group expects will account for most of the world's pork consumption growth in the next few years.
The U.S. company grew from a single meat-packing plant in 1936 to a global giant with nine slaughtering plants and the capacity to process one entire hog nearly every second. Its headquarters in Smithfield, a small town in Virginia state, is known as the "Ham Capital of the World."
Global pork consumption grew an average 1.97 percent a year from 2008 to 2012 and is forecast to expand 1.99 percent from 2012 to 2018, WH Group said in its preliminary prospectus, citing estimates from research firm Frost & Sullivan.
The bulk of the growth will come from China, where consumption is set to expand 3.1 percent a year through 2018, the company said.
In 2012, per capita consumption of animal protein in China reached 53.9 kilograms, paling in comparison to the 111.29 kilograms in the United States, according to the prospectus.
HONG KONG IPOS
The WH Group deal would nearly double IPO volumes in Hong Kong since the beginning of the year to $12.1 billion and lift the city past New York as the world's biggest venue for new listings so far in 2014.
About 80 percent of the offering consists of new shares from WH Group, with the rest to be sold by existing shareholders looking to reduce their stakes.
Selling shareholders include a subsidiary of Goldman Sachs , Singapore state investor Temasek Holdings and CDH Investments - one of China's biggest and oldest private equity firms.
Private equity firm New Horizons - founded by Winston Wen, son of China's former premier Wen Jiabao - will also be selling part of its stake, the term sheet showed.
($1 = 7.7531 Hong Kong Dollars)
(Reporting by Elzio Barreto; Editing by Ryan Woo)