Lead manager JPMorgan completed a $97 million ADR for Webzen yesterday (Tuesday), the first ADR IPO from Korea in three years. The deal topped a spectacular year for the company, which has seen its share price skyrocket 450% since listing on the Kosdaq in May 2003.
Having established itself domestically, the next natural step for the company was the development of an international investor base and sourcing funds for future acquisitions. At the moment it is reliant on just one product - Mu: a three-dimensional massively multiplayer online role-playing game (MMORPG).
Its 8.7 million unit ADR offering has achieved both of these aims and increased foreign holdings in the stock from 10% to nearly 50%. International roadshows had the twin benefit of pushing up the company's share price and bringing in new international accounts ahead of pricing.
Foreign holdings of the company's domestic stock, for example, rose from 10% to 18% over the course of the marketing period. The all new share expands the existing equity base by 30%.
Pricing came at $11.17 per ADS, which represents an 8.24% discount to the stock's Won144,000 close in Korea. There is a ratio of one unit per 10 shares and if the greenshoe is exercised, proceeds will rise to $117 million.
Over the course of the two days ahead of pricing the local stock fell about 7.1%, making the final discount appear steep. However, viewed from the vantage point of December 1 when roadshows began, the ADR has been priced at a 3.5% premium.
Books for the deal closed two times covered, with participation from about 70 accounts. By geography, the book split roughly 45% US, 30% Asia, 25% Europe. Asian specialists predominated, followed by US tech funds.
Webzen was priced on a 2004 P/E of 13.6 times and has typically traded at a slight discount to its domestic peer, NCSoft, currently at 16.5 times. Observers say it will be interesting to see if the gap disappears now that Webzen has successfully diversified its investor base.
Both companies are relatively unique, making international comparisons difficult. Observers say the best indirect comparable for an online gaming company would be a stock like Electronic Arts, the world's biggest distributor of video games. The US-based company is currently trading at roughly 20 times 2004 earnings.
What primarily attracted investors to Webzen is its growth profile and operating margins. For the first nine months of 2003, the company recorded an operating margin of 62%, revenues of $36.1 million and net income of $22.2 million. For the same period during 2002, by contrast, net income amounted to $10.3 million.
Specialists estimate that an interactive role playing game like Mu has an active shelf life of about five-years and quite a long tail beyond this. The game is currently two years old and revenues are derived via subscription.
The more concurrent users at any one time, the greater revenues generated. Year-to-date, the largest number of concurrent users in Korea has been 67,000 and 300,000 in China.
Clearly the challenge for the company now will be to use its position to expand Mu into new markets and develop a roster of games.
For lead manager JPMorgan, the offering is also a good result, as the bank has now led four out of the five international equity deals from Korea this year.
