The deal, which was jointly arranged by Citi and Credit Suisse, was launched with an aggressive price range that represented a discount of only 1% to 3.5% versus yesterdayÆs closing price of W45,000 and not surprisingly, the final price was fixed to allow for the maximum 3.5% discount. However, for a $2.2 billion block, this was still considered tight and some sources say the prevailing opinion among bankers before the trade was that it would take a discount closer to 5% to get it done.
At the final size, this is the largest Korean equity deal this year and the largest non-marketed placement in Asia for at least a couple of years, exceeding the $1.98 billion follow-on by Chinese oil producer CNOOC in April 2006.
The fact that the deal came the day after the manufacturer of thin-film transistor liquid crystal displays (TFT-LCDs) reported its best quarterly profit in more than three years, clearly helped to lift the demand, as did an attractive valuation and the fact that the sale was widely expected.
Philips, EuropeÆs largest consumer electronics maker and a provider of healthcare, lighting and lifestyle products, said in July that it would reduce its 32.9% stake in LG.Philips to less than 20% this year as part of its drive to divest non-core assets. Over the past 12 months it has also trimmed its stake in chip maker Taiwan Semiconductor Manufacturing Corp and sold a majority stake in its own semiconductor unit to a group of private equity firms.
Speculation of a sale intensified after LG.PhilipsÆ CEO Young Soo Kwon said on Tuesday that he expected Philips to reduce its stake to about 19.9% by the end of this year. This prompted short-selling by hedge funds yesterday and consequently, yesterdayÆs order book included some short-covering demand.
ôThe deal removes part of the overhang on the stock, although it will be interesting to see what Philips does with its remaining stake,ö one observer says, noting that the Dutch firm canÆt sell this without an agreement from LG Electronics who is the controlling shareholder and owns 37.9% of the company. LG.Philips was set up in 1999 as a joint venture between the two firms.
Philips will have a three-month lock-up on its remaining shares, but could then try to sell them either as a strategic stake to one buyer or through another block trade.
As often is the case with large Korean blocks, the LG.Philips deal also likely benefited from the fact that there are so few of these trades. So far this year, there have been only three Korean deals above $700 million û the Lone StarÆs divestment of an 11.3% stake in Korea Exchange Bank at $1.07 billion and Korea Deposit Insurance CorporationÆs (KDIC) sell-downs in Woori Finance and Shinhan Financial Group at $990 million and $1.21 billion, respectively.
Philips sold 46.4 million shares, which equalled just under 40% of its entire holding and will reduce its stake in the company to 19.9%. The price was indicated at W43,425 to W44,550 per share and ended up being fixed at the bottom of that range. According to sources the final price valued the company at no more than 6.8 times its 2008 earnings or 1.55 times book, which makes it look attractive in light of analyst projections of an improving outlook for the LCD industry.
On Tuesday, the company said its net profit more than doubled in the third quarter to W524 billion ($573 billion) compared with the second quarter partly thanks to higher shipments of LCD screens for computers, improving selling prices for flat panels and greater cost cuts.
According to sources, the deal price was pushed towards the bottom thanks to price sensitivity attached to some key orders. However, contrary to speculation in the market, the bookrunners were said to have been able to distribute the entire deal. This was made extra challenging by the fact that the deal wasnÆt launched until about 6pm Hong Kong time, which left only 3.5 hours to build the book before the US markets opened.
Had the books been left open into the US trading day, the bookrunners would have had to face the risk that the share price of LG.PhilipsÆ US-traded ADRs could fall below the offering range, thus making it less interesting for investors to buy the shares off-market. Indeed, the ADRs did fall at opening, but since the order books were closed 15 minutes earlier, this didnÆt matter. As of 1.10am this morning Hong Kong time, the LG.Philips ADR was down 2.7% at $24.29, which was still above the placement price of about $23.70 after adjusting for the exchange rate and the fact that each ADR accounts for two ordinary shares.
As a result, the ADR premium over the ordinary stock had actually widened to 2.5% from about 1.9% based on the previous dayÆs close. The companyÆs ordinary shares that are listed in Seoul have gained 62% so far this year.
The deal attracted more than 150 investors, including existing LG.Philips shareholders and other outright investors who were buying on the back of the improving industry outlook. Despite the tight discount, there was also good participation from domestic Korean institutions.
Earlier in the evening, Philips said in a statement announcing the deal that it may sell additional shares to the joint bookrunners to meet additional demand, but sources said early this morning that this was not in the cards. Philips said it will receive net proceeds of approximately Ç1.55 billion ($2.18 billion) from the sale, which is expected to result in a non-taxable gain of about Ç500 million in the fourth quarter this year.
The deal was hotly contested among the major investment banks and Citi and Credit Suisse were said to have beat the likes of Goldman Sachs, Morgan Stanley and UBS to the punch.
As a further indication of the demand for Korean stocks, KDIC last night managed to sell $159 million worth of shares in Doosan Infracore at a zero percent discount to the latest close even though the share price is up 80% year to date. The transaction, which represented KDICÆs entire stake in the manufacturer of construction machinery, was priced at the top of the W37,670 to W38,050 range.
Sources say this deal was about three times covered. Most of the demand came from Asia - Korea and Hong Kong in particular - but included a few chunky European orders. Goldman Sachs and Daewoo Securities were the joint bookrunners.
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