As they try to come to terms with the unpalatable reality of offloading the bank's 6.84% stake far below a $20 target price, KDB officials are said to have been vacillating between one potential sale option and another all week.
Local specialists say that the bank has three main options comprising: selling the stake to Nippon Steel with which it has a cross-shareholding agreement; selling the stake back to Posco; continuing with the ADR offering or potentially; a combination of the three. Merrill Lynch and Salomon Smith Barney are joint lead managers of the 23.1 million ADR offering, which would now raise $436 million for the group based on Posco's current trading price of $18.875 per unit.
Having started the week at $20 (a 12 month low), the counter has slipped by almost a $1 a day, although it did claw back slightly in New York trading on Thursday. Country specialists believe that should KDB still forge ahead with the deal early next week as it has previously indicated it would, the bank could be looking at pricing at as low as $16 per ADR.
For many observers, such an outcome would be deeply ironic given the long history of the transaction. The government's determination not to sell itself short led to the withdrawal of a domestic placement at Won150,000 per share in December 1999 and the postponement of an ADR at $22.125 per unit on June 20 this year which would have raised $520 million for the bank. At the time, the company's shares were trading at Won100,000 but the government baulked at the idea of selling the stock at a 3.8% discount to close, although the lead managers had been able to build a book at parity to the ADR.
This time round, local observers say that while the government has concluded the sale has to proceed, it is facing resistance from KDB which is not happy at the prospect of raising $100 million less than it would have done in June.
On the upside, bankers say that Wednesday's decision to lift Posco's 3% individual share holding limit as well as the 30% foreign shareholding limit, has had a positive follow through in Korea where domestic investors have moved back into the stock. While the stock market closed down 1.7% on Thursday, Posco rose 5.8% to Won82,000, as local investors bet that an influx of foreign investors would push the stock higher still.
"Unfortunately this is unlikey to follow through into the ADR as well," comments one observer, "and the net effect will be to slim the premium between the two even further. Where traditionally the ADR as traded at a 10% to local, it is now down in the low single digits."
The overhang of KDB's shares has meant that both the ADR and local scrip have underperformed the market all year. At $18.75 in afternoon trading in New York (Thursday), the ADR stood 46.25% down on the year, while the local stock is down 34.4%.
"Posco is trading at more than a 50% discount to DCF and on an EBITDA multiple of only three times 2000 earnings," says Credit Suisse First Boston analyst Kim Ho Cheol. "The average for the overall market is six times and for the steel sector worldwide, five to six times. On virtually any valuation, therefore, Posco is very, very cheap".
"But we believe that the privatisation will have a positive impact on its share price and we are still positive on the company," he continues. "This is a superior company and there are not many steel companies where the return on investment capital is higher than the weighted cost of capital."
In terms of timing the ADR, however, he believes that the government has completely got it wrong. "The steel cycle peaked in May," he concludes, "and prices are now declining. The last cycle only had a one year upturn, however, so there are arguments to suggest that the current downturn may only be a short-term correction. But this is by no means a consensus opinion. It all depends on your view of the global slowdown and oil prices."
Posco officials, meanwhile, also remain resigned to the fact that the ADR premium will contract further should the deal emerge. Says one Seoul-based official, "Last time the ADR went below the underlying shares and if the deal comes back to market it will go down again. There are concerns, but I don't quite know what we can do about it."
One attempt to curtain shorting activity will be an accelerated schedule and specialists say that instead of roadshow presentations, there is likely to be a single conference call followed by a 48 hour bookbuild.
Behind Posco, local bankers say that the remaining pipeline for the year is looking ever slimmer. Rising crude oil prices are set to curtail a $1 billion exchangeable into Kepco and there are unlikely to be many domestic IPOs following the government's introduction of market stabilisation measures at the beginning of September. These require lead managers to stabilise aftermarket trading of any IPO that dips below 80% of the issue price for two months after listing.
Further down the line, a decision on lead managers for Samsung Electronics $2 billion New York Stock Exchange listing is imminent. Potentially the deal will rank second only to Korea Telecom in issue size and is being targeted for launch early in the second quarter of 2001. Alongside Samsung Securities which will be the domestic lead, bankers say that the company has indicated a preference for Goldman Sachs.
