Having expected the imposition of a research blackout late last week ahead of pricing just before Chinese New Year, syndicate members have instead been released from their confidentiality agreements for an exchangeable deal, which would have monetized part of SK Corp's stake in SK Telecom. Observers now believe the deal will not re-surface for at least two months as the group waits to see if SK Telecom's share price returns to a target level of Won290,000 per share.
SK Corp's reticence is not that surprising given the huge size of the deal and the current level of SK Telecom's share price relative to where it was trading when a mandate was first awarded to Credit Suisse First Boston and Goldman Sachs in early December. Although the stock significantly underperformed the Kospi throughout the whole of 2001 and ended the year down, it spiked sharply upwards in the latter three months as local investors returned to the market in force and chased the most liquid stocks of which SK Telecom is one of the most significant, representing 11.26% of the index.
For the last 10 days, however, its share price has consistently trended downwards, closing yesterday (Wednesday) at Won 249,000, some Won50,000 lower than SK Corp would like it to be. For what was expected to be a 9.6 million share offering, this would represent a roughly $325 million drop in proceeds, a not inconsequential amount for a company intending to use the money to reduce its debt load.
But, most observers believe the company is unlikely to benefit from trying to find a better time to launch the deal since the stock is not expected to rebound until the overhang is removed. Similarly, as rumours about a postponement began circulating in Korea at the beginning of the week, the parent has also seen its share price hit, falling about 4% to Wednesday's close.
Alongside CSFB and Goldman, six co-managers had been appointed to lead the transaction comprising: ABN AMRO, Deutsche Bank, HSBC, ING Barings, Lehman Brothers and SG Securities. At current trading levels, the deal would have raised $1.824 billion, representing a 10.76% sell-down.
Based on end September figures, SK Corp holds 34.11% of SK Telecom, with Korea Telecom and Posco also owning respectively 13.39% and 6.5%. Until the end of 2000, some 14.5% of SK Corp's holding had been in an offshore SPV known as Signum IX, set up to facilitate the sale of a strategic stake to NTT DoCoMo. These shares subsequently reverted back to the parent at the end of the year after the sale fell through.
On a fundamentals basis, analysts also have mixed views of the stock. Supporters argue that the increasing migration of existing 2G subscribers to higher margin 2.5G will boost earnings, while detractors comment that the additional marketing costs will depress them.
"We're not that bullish as we think the potential for data revenue has been overplayed and voice revenue is topping out," says one Seoul-based analyst.
Others point out that while Korean telco valuations lag the Asian average, the country has led the world in the migration from 2G to 2.5G, which provides 3G quality services over existing 2G spectrum. As one analyst puts it, "2.5G is much more efficient than 2G as it uses the same network but there is more throughput per station. We think SK Telecom's revenue should consequently increase this year, while costs will decrease because its current network covers 90% of the population and only maintenance capex is required."
To date about 23% of its subscribers have migrated to 2.5G handsets compared to 7.4% for rival KT Freetel, although analysts point out that the latter is starting to catch up fast as it has a higher proportion of younger subscribers, more willing and adept data users.
Analysts also highlight the growth prospects of mobile commerce - a marriage of credit cards and wireless data - estimated to account for 10% of all credit card transactions in the Republic over the next three years.
Finally, there is the merger of SK Telecom and Shinsegi Telecom, which was finally approved by the regulator late last week and creates a mobile giant with just over 50% of all subscribers. Since the purchase was completed with Treasury shares, analysts estimate that it will increase rather than depress EPS.
"The merged entity should see EPS increase by 35% over the course of 2002, compared to a 20% increase had the merger not gone through," says one.
