Having averaged a 9% premium to underlying since the beginning of this year, Korea Telecom's outstanding ADR had edged down to 5.5% at the end of last week and most market participants believe that it will be at parity to the underlying by Wednesday, when the 55.5 million share deal is scheduled to price overnight in Asia.
In a bid to stop the inevitable short selling pressure that will dominate the last few days of presentations in the US, the government has successfully forced every single syndicate bank to sign a declaration committing each one not to short sell on their own account before the deal prices. Nevertheless, syndicate bankers believe there remains a high probability of the government having to face the politically uncomfortable decision of whether to sell a national asset at a lower price to foreign investors than domestic investors will be able to buy it locally.
For many, the key test will therefore be whether the government has learnt anything from past mistakes, notably with Pohang Iron & Steel (Posco), which completed its privatization last September after two previous failed attempts. Three months earlier in June 2000, the government had rejected the two leads’ offer to price the deal at parity to the ADR and a 3.8% discount to the underlying.
Come September, when the deal re-surfaced for a third time, the government was faced with a slightly slimmer discount to underlying, but less proceeds as the stock had fallen 15% in the interim period. Again lead managers Merrill Lynch and Salomon Smith Barney offered the government a deal at parity to the ADR, but this was rejected in favour of partial placement with international investors (58%) at parity to the ADR and a 1.24% discount to underlying.
The remaining one third was to be bought back by Posco itself. By the time the steel company finally gained board approval to purchase scrip at the prevailing local price in early October, however, it had fallen 6% below the ADR launch price and the government was left feeling that it had lost out for a fourth time.
Yet despite the technical difficulties presented by Korean ADR offerings, observers report growing demand for Korea Telecom on a fundamentals basis. “No-one queries its attractive valuation against regional and international peers,” says one banker.
Others add that the government has also dispelled some, but not all, concerns about the huge overhang of its remaining 40.1% stake post offering. Under the current timetable, the government is offering 17.8% of the company through an ADR structure and then hopes to sell 15% to a strategic investor, of which 10% will comprise new shares and 5% existing shares.
“A number of investors have asked why the company needs a strategic investor and why it’s predominantly attracting one through a new share sale,” one banker comments. “The answer is that it wants an international tie-up to make sure Korea Telecom remains a technological leader and the government also wants it to be in the form of new shares so that the company will realize the proceeds.”
Following the completion of a strategic stake, the government has indicated that it would then like to sell its remaining 35.1% stake by 2002, but has repeatedly emphasized that the date is far from concrete.
Bankers also report that investors have been particularly impressed with the strategic vision and English speaking abilities of CEO Lee Sang Chul, president of Korea FreeTel until January this year.
Morgan Stanley and UBS Warburg are joint global coordinators of the global offering, which has a 100% jumpball and no cap on the leads' selling concession.