A busy fourth quarter in Korean equity capital markets is unlikely to be extended through 2015 now that volatile oil prices have delayed a handful of potentially big deals.
Korea’s equity capital markets, which have been relatively staid this decade, will remain at ease in keeping with the secondary market. The Kospi 200 benchmark index has been stuck between 225 and 275 points over the past four years, during which time daily average volumes have gently stagnated.
The last big year for initial public offerings in Korea was 2010, when Samsung Life Insurance raised $4.4 billion and Korea Life raised $1.5 billion.
Since then it’s been quiet; quiet, that is, until the fourth quarter of 2014, when the market sprang back to life. Two IPOs, Samsung SDS’s $1.1 billion listing in October and Cheil Industries’s $1.4 billion deal in December, sparked hope for more.
The Financial Supervisory Commission authorised local mutual funds mandated to invest in high-yield bonds to expand into IPO deals, helping fuel investor expectations of additional opportunities, said Chae Byungkweon, managing director at KDB Daewoo Securities, which lead-managed the Cheil transaction.
Chae estimated some $2 billion-worth of domestic funds have been raised or opened for investing in IPOs since the Cheil transaction, seeking high-return investment opportunities.
“ECM activity sparked new fundraising, and those funds are still there,” he said.
But the deals have not been coming, at least not in the primary market. Hyundai Glovis, a subsidiary of Korea’s largest chaebol Hyundai Motor Group, did place a little more than $1 billion in a follow-on transaction lead-managed by Citi and HN Investment & Securities in February. But nothing above $500 million has emerged since – and bankers doubt this year will see anything like $1 billion jumbos.
As such, Korea ECM looks likely to experience another extended respite.
DYNASTY
Most activity now is about dynasties addressing their corporate structures or shareholder arrangements. All three of the recent jumbo deals are examples.
Bankers said the Samsung SDS’s IPO proceeds would go to helping the group’s heir, Lee Jaeyong, pay inheritance taxes on assets to be passed on to him by his elderly father, Lee Kunhee. Cheil, a holding company for other Samsung assets, was also listed to further the family’s restructuring and make its ownership more transparent.
The family of Hyundai patriarch Chung Mongkoo, meanwhile, sold stakes in Glovis ahead of new anti-trust rules that would punish the family’s ownership structure.
The fact that Korean ECM deals are related to restructuring needs rather than raising finance to fund a company’s growth explains why the country’s IPO market is generally quiet, whereas mergers and acquisitions remain active.
“The market is mature and there are few companies left that would seek a listing,” said one executive in Seoul at a foreign investment bank.
Given that a typical IPO involves 20% to 30% of a company’s total outstanding shares, for a company to raise $1 billion implies a $4 billion market capitalisation.
Bankers say very few of the companies in their pipelines are of such size. Even the large ones will need to price an IPO at a discount in order to enjoy a pop in the secondary market and please the buy side.
Today, the only pop in Korea is of the musical kind.
Of course there are plenty of restructuring stories, and if market conditions change, ECM bankers could get busy again. Local investment banks such as KDB Daewoo, NH Investment & Securities, and Korea Investment & Securities are picking up more mid-sized business.
They are also less picky about fees, with bankers earning no more than 100bps for an IPO lead manager role, as little as 70bps for the rare convertible bond, and 25-40bps for placing block trades.
“And that’s the rack rate,” the foreign banker said. “The reality is often worse.”
MODEST PIPELINE
Korea is likely to throw up half a dozen mid-sized deals, as it consistently does most years.
The Chung family’s ongoing need to restructure means a Hyundai subsidiary, advertising agency Innocean Worldwide, is slated to IPO in June. It could possibly raise up to $500 million, depending on how its existing shareholders agree to restructure, according to a banker.
Chung Mongkoo’s eldest daughter, Chung Sungyi, owns 40%, while his son Chung Euisun owns 10% and the Chung Mongkoo Foundation owns another 10%; Morgan Stanley’s private equity arm owns 30% and local venture capital operator Stic owns 10%.
As of December 2013, a 10% entry stake in the company was valued at W1 billion (about $900 million), and the shareholders won’t list the company without receiving a higher valuation.
NH, KDB Daewoo, Citi, and Deutsche Bank are advising Innocean.
Another $500 million-ish IPO slated for June is Mirae Asset Life Insurance, a unit of Mirae Asset Group. Mirae tried to list its life business in 2009 but market conditions proved unkind.
In 2011, the life company sold preference shares at about W14,000 per share to nine domestic institutional investors, such as the National Pension Service, as well as to Japan’s Orix. Although the proceeds went to expanding the life company’s operations, Mirae Asset last year bought all of those shares back, again at an undisclosed price.
It now owns 100% but a banker said any IPO is unlikely to yield more than 60 cents to 70 cents on those shares.
The pricing of the life company’s shares that have traded over the counter in the past 12 months has been volatile, ranging from W8,000 to W13,000 per share.
Comparable listed stocks such as Hanhwa Life and Tongyang Life trade at 0.8 to 0.9 times price-to-book. If Mirae can achieve a superior P/B ratio of 0.9x for its life unit, that would imply a share price of W10,000 to W11,000, a banker said.
Citi, Daiwa Securities and Samsung Securities are advising Mirae Asset on the life insurer’s listing.
Other companies have postponed a potential listing in the wake of volatile oil prices. Revenues at refinery and chemical companies have been negatively impacted by the sharp downward turn in crude oil prices (WTI crude fell from nearly $100/bbl in July 2014 to $47/bbl as of April 2015).
Refineries, shipbuilders and chemical producers in Korea are unprofitable and need to go public to restructure. The oil shock makes that restructuring more urgent but also makes it harder to tap equity capital.
SK Lubricants and Hyundai Oil Bank have both postponed long-awaited IPOs.
Although SK Lubricants has no listed comparables in Korea, Hyundai Oil Bank’s business is similar to the listed S-Oil Corporation. Its stock price has been volatile, tumbling from W65,000/share in April 2014 to below W40,000/share in October, but since then it has fully recovered.
Other potentially large IPOs such as Kyobo Life Insurance and Posco Engineering & Construction (which could IPO in a few years if an expected private placement to Saudi investors pans out) could be jumbo-sized but will take a long time to plan and execute.
Otherwise, $500 million transactions are as big as the Korean IPO market is likely to see this year.
