The Korean company, which is part of the SK group, was looking to sell between W1.04 trillion and W1.19 trillion ($998 million and $1.15 billion) worth of shares, which would have made it the largest Korean listing in more than two years û after Lotte ShoppingÆs W3.4 billion ($3.5 billion) deal in February 2006 - and the first this year with an international tranche. The IPO was due to price yesterday.
According to sources familiar with the offering, the key issue for the company was the sharp drop in the share price of SK Holdings during the marketing period. Because SK C&C owns 28% of SK Holdings and derives more than 75% of its value from this stake, each percentage point drop in SK HoldingsÆ share price made SK C&CÆs offering price seem relatively less attractive. SK Holdings fell 7.2% during the 2.5-week bookbuilding period and almost 20% since the price range was determined û and thatÆs after it was already down 52% from an early November high of W285,000 when SK C&C launched its deal on June 16.
At the start of the bookbuilding, the price range valued SK C&C at a discount of about 25% to SK Holdings, while the latter was already trading at a holding company discount of 25%-40% versus the value of its various listed units.
In a regulatory filing in Korean, which was cited by Reuters, SK C&C said it ôfelt that fair pricing of the shares would be difficult at this timeö and thus had ôdecided to delay the IPO until a more suitable time comesö.
In theory it would have been possible for the company to fix the price below the indicated range, but sources familiar with the offering say it was unclear whether this was ever an issue or if there was sufficient demand to go ahead at any price.
The decision to pull the deal would have been less difficult for SK C&C than for many of the other listing candidates that have faced the same situation this year, since the Korean company wasnÆt actually raising any money from the IPO û rather, all the shares were secondary. This could have meant that it saw little reason to try and patch together a deal at a lower price. At the same time, though, it is possible that the two sellers were unwilling to part with their shares at a price below the indicated range.
The unusual offering structuring was the result of a regulatory requirement to unwind the cross shareholdings within the SK group. In this particular deal SK Telecom and SK Networks were selling their combined 45% stake in SK C&C, which is the company through which Tae-won Chey, who is the chairman of both SK C&C and SK Holdings, effectively controls the group. SK Holdings, which was formed last July when SK Corp was split up into one holding company and one operational unit (SK Energy), owns 22% of SK Telecom and 41% of SK Networks.
The group has until the middle of next year to unwind the cross ownerships, which means there was no real urgency in pushing through a poorly valued deal at this time.
The IPO comprised 9 million shares, of which SK Telecom was selling 6 million and SK Networks the remaining 3 million. The offering price was set in a range between W115,000 and W132,000 apiece. Of the total, 20% was set aside for retail investors, 20% for the employee stock ownership and the remaining 60% was aimed at domestic and international investors. Woori Investment & Securities, which was the sole lead manager and bookrunner for both the domestic and international tranches, had indicated that no more than 10%-20% of the deal was likely to be placed with foreign investors though, which may have made some foreign institutions less inclined to look at the deal. Merrill Lynch acted as the international tranche coordinator, but was not involved in the bookbuilding.
According to one source, there were overseas investors who did the work on the deal and took the time to understand the companyÆs business, which is focused specifically on the telecom and financial sectors and is divided into three core areas: outsourcing services, systems integration services and consulting services. Historically more than half of its business has come from other companies within the SK Group, which is the third largest business group in Korea in terms of assets, and in 2007 services provided to other group companies accounted for 57.8% of its total revenues. SK Telecom, which is its largest customer, generated 35% of the top line all by itself.
Since there are no listed Korean companies in the IT services sector, there was some scarcity value attached to the IPO û although obviously not at any price.
Given its unusual deal structure, the fact that this deal had to be pulled may not have that much impact on the sentiment for other IPOs in the pipeline such as Posco Engineering & Construction and Lotte Engineering & Construction. However, the withdrawal of any deal from the market is certainly never positive.
According to Dealogic, the volume of IPOs in Asia ex-Japan amounted to $14.15 billion in the first six months this year, which is down 50% from $28.47 billion in the first half of 2007. In Korea, a mere $364 million has been raised from new listings in the first half, compared with $807 million in the same period last year.
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