HONG KONG — Prada’s long-awaited initial public offering is attracting institutional investors but retail investors appear to be shying away.
This story first appeared in the June 16, 2011 issue of WWD. Subscribe Today.
“It seems like an awful market now, unless you’re a famous Italian brand,” said Ben Collett, head of equities at Louis Capital Markets in Hong Kong. He said he’s seeing strong demand for Prada shares from institutional clients despite an overall softening market for IPOs in the city.
“We’ve been trying to get as much as we can,” he said.
According to sources familiar with the situation, the institutional portion of the offering is already five times oversubscribed.
But the reception from retail investors doesn’t seem to be as enthusiastic. Hong Kong ipos are required to set aside a portion of the listing — about 10 percent — to the general public. Alvin Cheung, associate director of Prudential Brokerage Ltd., characterized retail demand as “worse than expected.”
“Prada is a popular brand name” but, thus far, Cheung has seen only 10 million Hong Kong dollars, or $1.28 million, in margin financing for the deal. For an offering of this size, Cheung said he would usually anticipate closer to 100 million Hong Kong dollars, or about $12.9 million, in margin financing. Hong Kong investors often buy ipos on margin, borrowing in order to buy more shares and thus make more profit.
Prada has done a lot of publicity for its IPO with advertisements and a special fashion show earlier this month. The word is that the house was even giving out free handbags at the road show.
Unofficial figures on the retail portion of the offering are not yet available but sources say they don’t believe the claw back option will be exercised. The claw back is a unique mechanism in the Hong Kong market that can increase the size of the retail offering depending on the level of oversubscription.
Market watchers claim the offering’s luxury price tag and the fact that Hong Kong investors are subject to pay capital gains tax in Italy is making retail investors think twice.
Prada’s offering is marketed at between 36.5 Hong Kong dollars and 48 Hong Kong dollars per share ($4.68 and $6.17), and could generate between $2 billion and $2.6 billion. If priced on the high side of the range, Prada’s valuation would be close to 28 times earnings. That’s rich compared to other popular luxury brands such as Gucci Group, which is trading at 14 times, or Tiffany & Co., trading at 21 times.
The other hurdle is a possible capital gains tax. Because Hong Kong and Italy have not signed a double-taxation treaty, Hong Kong investors would be liable to pay a 12.5 percent tax on gains made from selling Prada shares. For Hong Kong investors, who do not have to pay capital gains in the city, this is an unusual and unheard of deterrent.
On Tuesday, Phillip Securities analyst Philip Mok issued a report suggesting that investors not subscribe to the offer, citing the elevated price tag, Prada’s “slow” growth in Europe and North America; its “overreliance” on the Prada and Miu Miu brands, and the company’s lack of a clear succession strategy. President Miuccia Prada and chief executive officer Patrizio Bertelli are 63- and 65-years-old, respectively, according to the IPO prospectus.
The retail offering period closes Wednesday. But market watchers say even if retail demand is somewhat cool, Prada’s offering is faring well, particularly when considering current market conditions.
“There are lots of deals coming together at the same time. Meanwhile, there are still worries about the credit crisis, Middle East and a few negative stories about China,” said Philippe Espinasse, a Hong Kong-based consultant and author of “IPO: A Global Guide.”
Espinasse said the valuation is a bit high for his taste but he expects the IPO to fare well. “It’s a pretty well-managed company…they’ve cut down on debt a lot,” he said.