Korean steel manufacturer Posco on Wednesday raised W807.3 billion ($743 million) by selling a quarter of the treasury shares it holds on its own balance sheet. The shares were sold to a small group of international investors through a club deal that was flagged to the broader market only after it was completed.
The deal was done without a term sheet but, according to an announcement sent to investors in the early evening Hong Kong time, it was priced at W323,800 per share. That translates into a 4.76% discount to Wednesday’s close of W340,000 – slightly below the maximum 5% discount allowed for sales of treasury shares in Korea.
There was no information on exactly how many accounts participated in the deal, but it is believed to have been slightly more than 10. Still, each investor will have had to make a sizeable commitment, which should provide support for the stock in the aftermarket.
Indeed, Posco’s American depositary receipts held up well in New York trading after the deal was announced, falling just 2.6% to $76.04. Adjusted for the exchange rate and the fact that there are four common shares per ADR, that equals a price in Korean won of W330,470 – a 2.1% premium to the placement price.
Private placements, or club deals, have become increasingly popular in the past 12 to 18 months as they tend to provide more certainty for the seller that the deal will get done, particularly when it comes to illiquid stocks. The reason is that the bookrunners will, for the most part, approach investors who are either known supporters of the stock, or believed to be seeking exposure to this particular name or sector.
By offering them a meaningful allocation, the seller is often able to get a slightly tighter discount than on a public block trade or placement. One source said the buyers of this particular deal included quite a few existing shareholders.
Other private placements of secondary shares in the past year include Temasek’s $56 million sale of its remaining stake in Huaneng Renewables and Zurich Insurance Group's $283 million sale of a quarter of its stake in New China Life Insurance, both in July this year. There were also the final two sell-downs in Samsonite by CVC Capital Partners and Royal Bank of Scotland in January and March, which raised a combined $817 million; and private equity firm Permira’s $755 million sale of shares in casino operator Galaxy Entertainment Group at the end of August last year.
Posco sold approximately 2.49 million treasury shares, which accounted for about 2.9% of the existing share capital and 14 to 15 trading days, based on the average daily trading volume in the past one to three months.
The deal had not been expected by the market and one banker noted that this is the first time the Korean steel maker sells its own shares through the equity capital markets since it was privatised in 2000. The treasury shares it currently holds were acquired mostly between 2005 and 2007, according to the company’s website.
However, a couple of block trades by SK Telecom and Woori Finance Holdings in 2012 and 2009 respectively has given investors some opportunities to pick up Posco shares in bulk in the past few years.
Interestingly, the SK Telecom sell-down in October last year was also done through a private placement after an earlier attempt to trim its stake through a traditional bock trade had failed. The telecom operator raised $391 million from the sale of a 1.4% stake at a 3.3% discount to the market price at the time. Morgan Stanley was the sole bookrunner for that deal.
Posco’s share price is slightly lower now than it was when SK Telecom sold shares a year ago, but the stock has had a good run lately and added 16.4% since the most recent low-point in early July. In the past five days alone, it has gained 5.8%.
The gains have come on the back of positive economic data that have sparked a renewed interest in cyclical stocks, such as steel makers. The Chinese steel manufacturers have seen an even stronger rebound with Hong Kong-listed Angang Steel and Maanshan Iron & Steel up 53% and 37% respectively since early July.
As an index heavyweight with a market cap of more than $27 billion, Posco has also benefitted as investors have shifted capital away from Asean and towards the North Asian markets instead. According to Bloomberg, 35 of the 47 analysts who cover the company recommend investors to buy the stock, while only one suggest they sell. The rest rate the stock a “hold”.
From that perspective, the timing of the deal is good. Following this transaction, investors may well start to question whether Posco intends to sell more of its treasury shares, however. According to the pricing sheet, there will be a six-month lock-up on the issuer, but Posco will still own about 7.45 million treasury shares (equal to 8.5% of the company) that it can sell once that expires. Based on the placement price, those shares are currently valued at about $2.2 billion.
According to sources, the private placement was arranged by Bank of America Merrill Lynch and Goldman Sachs. The two banks have been mandated for a transaction for a little while and started to approach and wall-cross investors on Monday this week.
Rumours of a deal started to gain pace after the market closed on Wednesday and at the time it was suggested that HSBC and UBS would act as joint bookrunners on the transaction. That turned out not to be the case, although there was some talk late Wednesday that they could still be included in a junior capacity.
