Few are hailing Korea Telecom 2 a major triumph, but a number believe that the $2.242 billion deal that priced yesterday (Thursday) can be considered a minor one. For the Korean government, it will have come as a great relief that it has not been faced with its usual dilemma of whether to price a national asset at a cheaper price to foreigners than local investors are able to buy it. More importantly, the completion of the deal is likely to inject some momentum back into its privatization and now allow KT to concentrate on finding a strategic investor to move the company forwards.
With Morgan Stanley, UBS Warburg and LG Securities as joint bookrunners, an 11.004 million unit deal was priced at noon Asian time at $20.20, representing a 0.74% discount to close. Over the previous day's trading, the ADR premium had collapsed from around 5.5% to 0.9%, but crucially remained above parity to the stock's W52,300 close in Korea, allowing the deal to come at a 0.35% premium to the underlying.
One unit equals half a common share and there is no greenshoe.
Says Jon Fouts, Morgan Stanley's Asian head of ECM, "This deal sets a benchmark for the whole privatization process and a very strong tone going forwards. It represents the second largest deal to ever come out of Korea after Korea Telecom 1, a deal also led by us, and is therefore also the largest follow-on offering from the Republic. We are extremely pleased that we've been able to price it at a premium to the local stock."
With the book said to be 1.5 times oversubscribed, observers report a total of 100 investors on the back of 111 one-on-one meetings over the course of the two-week roadshow. Of this number, about 10 accounts were said to top the $50 million mark, with an overall 75%/15% split between institutional and retail investors. The leads also claimed very low participation by hedge funds, amounting to just under 10% of the total.
By geography, bankers say that about 50% of the deal went into the US, with about 25% into Asia and the remaining 25% into Europe. One of the more unusual aspects of the transaction was the inclusion of a public offer without listing in Japan, which accounted for 14% of the total and was very heavily retail oriented.
"Korea Telecom has a very strong brand name in Asia and Japan in particular," says one banker. "It attracted a lot of retail investors and this helped underpin the entire deal."
For most market observers, the main drag on Korea Telecom's story has been the overhang of the government's remaining 35.1% stake, following the completion of a 17.8% divestment through the ADR. During roadshows, officials went out of their way to emphasize that a previous timetable to completely privatize the company by June 2002 is not set in stone and remains conditional on market circumstances.
They have also slightly revised terms on the sale of a strategic stake in a bid to make the overhang slightly more palatable. Whereas previously the government had hoped to sell 10% in the form of primary shares and 5% in secondary shares, it has now reversed the figures and will only sell 5% through primary shares. The stake will also be subject to a lock-up until June 2002.
However as one syndicate banker comments, "Korea Telecom suffers from the same problem as NTT. Every year, the Japanese government tries to push out $8 billion to $9 billion on the market and the simple laws of supply and demand mean that this weighs down on its share price."
Observers also comment that the company suffers from the need to factor in a 'Korea discount'. Says one banker, "Within the Korean context, KT is a great company. It isn't overleveraged, it has good management, good growth prospects and is targetting its resources at the two most lucrative future earnings streams - wireless and data.
"Unfortunately," he adds. "It's tarred by the wider economic problems of the Republic and the bad corporate governance which still pervades much of the business sector. For this reason, the whole stock market trades on very low multiples relative to the rest of Asia and this drags down KT as well."
Compared to regional telecommunications companies, Korea Telecom is therefore not quite as cheap as if first appears, but is still said to offer good value. While, for example, KT averages an EV/EBITDA multiple of about 4.9 times 2001 earnings, a company such as Singapore Telecommunications, the favoured bidder for a strategic stake, trades around the 7.4 times level.
For the dozen or so syndicate banks that participated alongside the leads, there were two major concerns, although a number acknowledged that getting such a large telecoms deal out in the current market was an achievement. Chiefly their concerns surrounded the extremely parsimonious distribution of fees and the deal's track record in immediate secondary market trading.
In the first instance, the leads were to some extent hamstrung by the fact that gross fees on the deal were an extremely slim 1.5% and also incorporated all expenses. Fees were split 0.3% managers, 0.22% underwriters and 0.975% selling concession.
However, as one disgruntled syndicate head comments, "There was no cap whatsoever on the leads' selling concession and they took out a huge praecipium representing 50% of the management and underwriting fees. All the expenses were also deducted from this portion of the fees. There was absolutely no point in us participating at all."
Nevertheless, it was reported that the leads were offering syndicate members additional stock even though allotments had been finalised a few hours earlier. Most declined on the basis that it was cheaper to buy the ADR in the secondary market, since it had tracked the Korean market down and was trading at $19.50 by London's open.
Alongside the leads, co-leads comprised Daewoo Securities, Deutsche Bank, ING Barings, Goldman Sachs and Salomon Smith Barney, while co-managers were ABN AMRO, DKrW, Hyundai Securities and Lehman Brothers. Nomura was also a co-ordinator of the Japanese tranche.
Most conclude that the initial trading pattern is indicative of a tough slog. Analysts, however, continue to have a buy recommendation on a stock that is considered both a growth and value play.
As one banker concludes, “The growth profile of this company sets it apart from the entire Korean market. On an EBITDA basis it is growing by about 10% a year and on an earnings basis by about 20%.”
Most conclude that in a difficult year for Asian equities, it was no mean feat for all concerned to get this deal off the ground.
