The stock tumbled as much as 5.7% to a low of W59,500 shortly after opening, and while recovering from there fairly quickly, it never returned above the W60,700 placement price and eventually closed 4.1% lower at W60,500.
The sell-off came amid speculation that the selling shareholder was Carl Icahn, the shareholder activist who earlier this year, with a partner, led a seven-month campaign to push KT&G's management to boost the shareholder value of the company. The pair dissolved their alliance in August and have been quiet since then, but their prior work is considered key to KT&GÆs 40% gain this year (before the placement). By comparison, the Kospi is up a mere 3.4%.
It wasnÆt confirmed that Icahn was the seller of the shares, however, and the divestment by any substantial shareholder when the shares are trading at a record is always bound to make other shareholders question whether the sale could be a signal that the selling party feels the share price is close to its peak. Talk in the market that Citigroup hadnÆt been able to place the entire trade with investors outside the bank may also have contributed to the selling pressure.
However, sources close to the transaction say that while demand wasnÆt overwhelming, the placement was fully subscribed and all the shares were placed in the market. The final order book contained about 45 investors, with more than 90% of the demand coming from Asian-based accounts. A few US investors accounted for about 5%, while less than 1% of the deal was said to have been placed with European investors.
According to one observer, KT&G is a stock that is driven by domestic investors and since internationally targeted placements like this one cannot be sold onshore, the transaction was unable to capture that pocket of ônaturalö demand. The tight discount also likely kept some investors away.
The 7 million secondary shares were offered to investors at a price that ranged from W60,700 (where it was ultimately fixed) and W62,500, which represented a discount of 1% to 3.8% over MondayÆs close of W63,100.
The buyers would have been encouraged by the fact that several analysts have upgraded their recommendations on the stock in recent weeks to take account of the positive effects from the companyÆs more shareholder-friendly approach. Many followers of the stock now have a target price in the W70,000 to W80,000 range, suggesting at least 15% upside versus the placement price.
The share price rose 7.5% over the five trading days just prior to the placement as investors were buying in to become eligible for the annual dividend which is expected to be increased to translate to a yield of about 4.2% compared with 3.0% in 2005.
Higher dividend payouts was one of the things Icahn and hedge fund manager Warren Lichtenstein requested in their campaign to improve the shareholder value of the company. They also wanted the management to start buying back shares and to divest the companyÆs ginseng and real estate assets to release hidden value.
To underline the seriousness of their demands, the pair threatened to make a $10 billion hostile bid for KT&G, although they never actually made a formal takeover offer.
The two partners backed down on the divestment issue after the management agreed in early August to buy back about $1.3 billion worth of shares this year and spend another $1.5 billion on higher dividends and buybacks until 2008, and at the end of August Icahn publicly disclosed that he had ended his alliance with Lichtenstein. This led to expectations that the two would sell their shares and some market watchers said yesterday that if Icahn was indeed the seller of MondayÆs block it would remove an overhang on the stock.
However, analysts following the company note that there had recently been rumours that Icahn and Lichtenstein were gearing up for a second battle with the management and would try to get their hands on one of four board seats that will become available in March. Those rumours were believed to have been the trigger for active buying of the KT&G stock by hedge funds last week.
ôI can see why people are disappointed if Icahn is the seller as I believe many investors thought this battle had more legs on it,ö says one analyst who declined to be named. And, he adds, even when Icahn doesnÆt work actively to increase value, the expectation that he may eventually do something tends to attract a fair amount of buying to the companies he is invested in.
Consequently ôinvestors would want to sell ahead of him getting out of a particular stock and if it was to be confirmed that he did sell most of his shares then I think the sell-off will continue for a few more days,ö he says.
Since MondayÆs transaction accounted for no more than 4.8% of the issued share capital û below the disclosure threshold of 5% - the seller doesnÆt in theory need to be a known shareholder in the company. However, IcahnÆs most recent disclosure of his shareholding in August showed him having 7.8 million shares in the company through various funds and nobody went out of their way to deny the speculation of a sale yesterday. LichtensteinÆs Steel Partners held 4.5 million shares in August.
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