It has been a busy start to the week with several sizeable block trades and a couple of convertible bonds done in Asia, but jittery markets in Europe and the US finally took their toll last night, forcing SK Telecom to pull a planned sell-down in Korean steelmaker Posco.
The Korean telecom company, which owns about 2.85% of Posco, was aiming to raise up to $324 million from the sale of approximately 40% of its holdings at a 2% to 4% discount to the latest close.
The deal was launched despite the fact that US markets had been down overnight and that most Asian markets were in the red during the day. Korea’s Kospi index fell 0.6% and Posco itself lost 1.1% on its third straight day of declines. But initially it sounded like the deal would get done.
Indeed, the Posco block wasn’t the only trade in the market yesterday. Hop Hing Group, a Hong Kong-listed producer of edible oils that has recently ventured into the operation of fast food restaurants, launched a $91 million sell-down of secondary shares after the market closed to maintain its free-float at the required 25%; and earlier in the day Hong Kong-listed Yuexiu Reit launched a follow-on to raise between $385 million and $415 million to finance its earlier announced acquisition of the International Finance Centre in Guangzhou. By the time the Posco block hit the market, both those deals were said to be doing fine.
The Posco order book closed as planned at 8pm Hong Kong time and the idea was to price and allocate the shares before the company’s US-listed American depositary receipts (ADRs) started trading at 9.30pm. But the pricing got held up and during that time European markets continued to drift lower. Then US markets opened down and the Posco ADR fell as much as 4.4% in the first 10 minutes.
Later that evening sources said that SK Telecom had decided not to proceed with the sale of Posco shares at this time. They offered no explanation for the decision, except to note that overseas markets continued to get worse. The key European markets finished between 1.6% and 2.8% lower, although the US markets held up slightly better and the S&P 500 index closed just 0.6% down. Posco ended the session with a 2.3% loss.
There was also no information on whether the deal was initially covered at the indicated terms, although one source did allude to the fact that there wasn’t sufficient allocable demand in the book. Still, it is possible that investors came in initially, but started to withdraw their orders when the pricing got delayed. According to one early estimate, about 40 investors had submitted orders by the 8pm deadline.
SK Telecom was aiming to sell up to 1 million Posco shares, or about 1.15% of the company. The shares were offered at a price between W356,000 and W363,500, which translated into a discount of 2% to 4% versus yesterday’s close of W371,000. The total deal size was between W356 billion and W363.5 billion ($318 million to $324 million).
Citi, Credit Suisse and Morgan Stanley were joint bookrunners, while SK Securities was a co-manager.
It is unclear why the vendor initially decided to go ahead with the sale on a day that arguably did look weak, but according to one source, the approval to sell had only come through yesterday and the company seemingly wanted to get the deal done straight away.
Like many other companies in Korea, SK Telecom and Posco have a cross-shareholding. However, since 2003 Posco has been monetising the bulk of its holdings in the telecom operator through yen-denominated bonds that are exchangeable in SK Telecom ADRs, and which it has been rolling over at maturity.
Posco also sold 2.3 million SK Telecom shares through a block trade in April this year, reducing its remaining stake in the company (excluding the shares underlying the exchangeable bonds) to just over 2%. Posco raised $280 million from that sale, which was done on the same night that it sold $147 million worth of shares in KB Financial and $87 million of shares in Hana Financial.
Hop Hing Group
Meanwhile, the Hop Hing transaction was said to have attracted a lot of interest, although, according to a source, the bookrunners had secured anchor demand for almost the entire deal before launch.
The deal came after the controlling shareholder converted a CB that he had received as payment for the sale of fast food restaurant assets to the listed company some six months ago. The fast food assets — mainly the franchises for Yoshinoya and Dairy Queen in northern China — are valued at about $450 million, while Hop Hing has a market cap of only $30 million. As a result, the controlling shareholder ended up owning more than 94% of the company after converting the CB into shares and the free-float was reduced from 32% to just 0.8%
This sale will restore the free-float to about 25.2%.
The controlling shareholder offered to sell, through three separate entities, 1.905 billion existing shares (19.2% of the outstanding share capital) at a fixed price of HK$0.37 each, resulting in a total deal size of HK$704.9 million ($91 million). The price was the same as the conversion price on the CB and translated into a discount of 14% versus yesterday’s closing price of HK$0.43.
The price valued Hop Hing at about 18.8 times its estimated earnings for 2013, which is equal to a discount of 15% to 20% versus other small-cap restaurant chains listed in Hong Kong, such as Ajisen and Café de Coral. The latter two trade at 23 times and 22 times next year’s earnings respectively.
The source said that more than 20 investors participated in the transaction, including both long-only investors and hedge funds. All the buyers were said to have a long-term view with regard to the investment, however, which suggests that the stock will remain pretty illiquid even after restoring the free-float to 25%.
Bank of America Merrill Lynch and Barclays were joint bookrunners.
