Divestments by state-owned groups KDIC (Korea Deposit Insurance Corporation) and Daehan Investment Trust dominated Asian equity issuance yesterday (September 8), with the former placing $250 million in Woori and the latter $346.5 million in KT&G.
Both deals were timed to take advantage of recent, strong share price performance, although they came on a day when the Kospi was down 0.36%. However, downward pressure was attributed to profit taking and this would have been seen as a boon for long-term investors, who were able to invest at a lower price in a broadly rising market.
KT&G's deal (Korea Tobacco & Ginseng) was wrapped up first largely because lead manager Merrill Lynch executed it on a first come, first served basis. Daehan completely divested its 7.4% stake via a 13.4 million share offering.
Pricing was fixed at Won29,800, a 2.3% discount to the stock's Won30,500 close. When Merrill Lynch won the deal in July it promised a 2% discount - a level most of its rivals considered unfeasible. But the firm has been able to clear the deal only marginally wider than where it promised thanks to continuing strong share price momentum.
Considering that KT&G is viewed one of the most defensive stocks in Korea, its share price performance year-to-date has been phenomenal. The group is currently up 46.7%, in the process cutting its dividend yield from nearly 10% to just under 5%.
On the day of pricing the stock fell 2.7%, although this was in line with other defensive domestic plays such as Korea Gas, which was down 3.5% and Korea Telecom, down 2.5%.
Pricing is also tight relative to the year's other four international placements from Korea.
For example, Shinhan raised $533 million in March at a 2.78% discount via Morgan Stanley, followed by Hana in April with a $930 million deal at a 4.9% discount via UBS. Then in June, Credit Suisse First Boston led a $112 million issue for Hyundai Motor at a 1.8% discount. Goldman Sachs followed this in August with a $912 million GDR issue in Hyundai Motor at a 5% discount.
Given that larger deals tend to come at wider discounts, KT&G's 2.3% level was fairly aggressive. Yet investors say the $275 million worth of stock allocated on a first come, first served basis sold out within 20 minutes. About 50 investors participated.
The remaining $75 million was syndicated via bookbuild. Again investors say the order book closed five times covered, with participation by a similar number of accounts.
The offering represented about 28 days trading volume and will increase the stock's freefloat from 55% to 62%. KT&G is currently trading on a P/E ratio of 10.8 times 2004 earnings, a relatively high level compared to the Korean average.
But analysts remain relative upbeat given that KT&G's dividend remains rock solid and it continues to build profits by improving its average selling prices for cigarettes. It recently reported 1H operating profit of Won270.9 billion, up 38.9% year-on-year.
A few hours after KT&G came a $250 million sale in Woori Financial Holdings via Credit Suisse First Boston, Dongwon Securities, Lehman Brothers and Samsung Securities.
The transaction was somewhat unexpected given the government only recently announced the postponement of a prospective ADR issue because market conditions were not conducive. But in the end, the momentum propelling Korean banking stocks proved too compelling to ignore and the government came to market with a smaller deal that sets its divestment programme in motion.
KDIC has until March 2005 to sell its 87% stake in Woori. The ADR was envisaged as a 15% divestment and the current placement represents 5.1% of the holding company. Given here is now a 90 day lock-up on future sales, this deadline appears difficult to meet.
A 40 million share deal was upsized to 45 million shares and priced at Won7,200, a 3.1% discount to the stock's Won7,430 close. The government was keen to make sure it executed an issue above Woori's Won6,800 IPO price, a feat it has now achieved.
On the day of pricing, the stock dropped 2.6%, bu is up 8.94% year-to-date. However, this masks the strong performance of whole Korean banking sector during August when the Kospi Financial Index rose 24%. Since the beginning of August, Woori is up13%.
The placement generated strong demand, with the order book closing at $1.1 billion. Specialists estimated about 18% would be allocated to Korea, where roughly 60 investors placed orders. The international order book incorporated just over 100 accounts.
The deal represented about 30 days trading volume, but its significance lies in the impact it will have on Woori's freefloat. Because of KDIC's huge holding, only 13% is actively traded. Foreign investors are estimated to hold about half.
Woori is now Korea's third largest banking group, but it has historically traded at a discount to its peers. Partly this is because of its credit card exposures and partly because it is viewed as less of a pure banking play. According to Fox Pitt Kelton research, Woori is trading at 0.85 times 2005 book versus a 1.1 level for Kookmin, Hana and Shinhan.
Specialists believe that the stock price will continue to do well following the appointment of a new CEO and the sector's recovery from credit card delinquencies.
