Michelin sells Hankook Tire stake at 12.1% discount

French tyre manufacturer Michelin last night sold its entire 9.98% stake in Korea’s Hankook Tire through a block trade, ending a partnership between the two firms that started in 2003.

The seller initially aimed to raise between $586 million and $613 million from the divestment, but the deal ended up pricing below the initial offering range, resulting in a final deal size of W623 billion ($558 million).

Even so, this is the largest block trade in Asia since Permira raised $613 million from a sell-down in Macau casino operator Galaxy Entertainment Group in early September. It comes after Hankook’s share price hit a record high of W50,000 on November 4, which explains why Michelin decided to sell now.

The French company, whose full name is Compagnie Generale des Etablissements Michelin, offered approximately 15.2 million shares at a price between W43,000 and W45,000, which translated into a discount of 3.5% to 7.8% versus yesterday’s close of W46,650.

However, shortly before the order books were due to close at 10.30pm Hong Kong time, some additional demand came in below the price range. The demand, which likely came from one single order, was described as institutional and of very good quality and, according to a source, the inclusion of this additional demand would significantly improve the quality of the overall order book.

So, after a discussion with the seller, the bookrunner (Citi) decided to lower the price to W41,000 to accommodate this late demand. This meant the deal cleared at a discount of 12.1% — significantly wider than the 5.1% discount that Permira had to accept on the Galaxy sale. However, Hankook’s share price has gained 33% since late September so perhaps it can be justified.

As of early this morning it was unclear how the pricing would affect Citi’s fees on this transaction. If the US bank had to cover the entire difference between W41,000 and W43,000, it would cost it about $28 million. However, it seems likely that Michelin would have agreed to at least some reduction in the price.

In a press release issued early this morning, the company said the placement had been successfully completed at a price of €26.54 per share, which translates to W41,000, indicating that Citi wouldn’t be paying the company more than that.

Also, having bought more than half its stake, or 6.3%, before March 2006 when the share price was below W15,000 and having added to it in June 2008 when the price was again around W15,000, Michelin stood to make a hefty gain from the sale even at a 12% discount. According to a source, the company was also very focused on selling its entire stake in one go.

There was no information on whether the deal was covered before the late demand appeared, but the willingness by the bookrunner to lower the price suggests that it probably wasn’t. In other words, if Michelin wanted to sell its entire stake yesterday, it may have had little choice but to accept a lower price.

In a press release issued yesterday, Michelin said the sale of this “financial shareholding” is part of the company’s effort to optimise its portfolio, in line with a new growth strategy it presented a year ago.

“In improving its liquidity position, the proceeds of the sale will allow the group to accelerate its industrial strategy in high-growth markets, in particular by optimising and strengthening plants dedicated to the production of entry-level and medium-range segment (tier-2 and tier-3) products in the passenger car and truck tyre markets,” it said.

Michelin said its gain from the sale amounted to approximately €255 million. It didn’t comment on what will happen to its partnership with Hankook, which is the leading tyre manufacturer in Korea.

The two firms entered into a cooperation agreement in January 2003, which covered various operational areas and was intended to exploit synergies in the areas of research and development, tyre manufacturing and tyre distribution, and to support their respective growth in the coming years. As part of the agreement, Michelin agreed to purchase over time up to 10% of Hankook’s share price.

According to a source, slightly more than 50 investors took part in last night’s transaction. The buyers included both long-only investors and hedge funds, and there was good demand from domestic Korean accounts.