Another 1.8% of Hyundai Engineering changes hands

The $97 million trade seen as a precursor to the planned sale of a controlling stake later this year.
Another $97 million block of Hyundai Engineering and Construction shares changed hands Thursday when Korea Development Bank offloaded part of its holdings in the countryÆs largest builder at a tight 3% discount.

The transaction followed a similar sell-down by Korea Exchange Bank in June and is likely to increase speculation that Woori Bank, the third and final substantial shareholder (with shares available for sale in the capital markets), will also make a move imminently.

The KDB sale, which was launched after the market closed on Wednesday, but priced eary yesterday morning (August 3), also precedes the sale of a majority stake by the companyÆs creditors expected later this year.

The nine creditors, including KDB, KEB and Woori, are looking to sell a block of close to 51% of Hyundai Engineering to a strategic investor through an auction process. Such a sale became possible after the major creditors, which owned a combined 66% of the company, decided in April to release it from a five-year debt restructuring program.

Aside from the decision to offload a controlling stake through an M&A deal, this also opened the door for the three mentioned owners to sell an additional 15% through the capital markets.

KDB chose to sell 2 million shares of its portion, leaving 3.9 million for a potential second deal later on. The shares were offered at a discount between 3% and 5% to WednesdayÆs W48,000 close and were eventually priced at the tight end at W46,560 for a total deal size of W93.12 billion.

The discount was narrower than the 5% achieved by KEB in June even though yesterdayÆs sales price was 9% higher than the W42,700 fetched back then. However, the block sold by KDB yesterday through ABN AMRO Rothschild and Daewoo Securities, was only about one third the size of the 5.7-million-share block Morgan Stanley placed for KEB, which could explain why investors may have needed less incentive this time.

The gains since the previous placement hasnÆt come in a straight line, however, as Hyundai EngineeringÆs share price actually tumbled 13% in the two days after that trade. According to market talk, the collapse may have been caused by some investors offloading stock after receiving more shares in the placement than they had anticipated.

Even though the price has since recovered, some investors were said to have stayed away from the current offer as they didnÆt want to risk a similar situation. The order book was still about two times covered at the final price and just like last time about 70% of the allocation went to domestic Korean institutions, one source said.

One encouraging development, according to people familiar with the transaction, was the fact that about 40% of the international demand came from hedge funds even though liquidity in the Korean market was greatly reduced after the correction in May and June. When KEB sold its stake in June, hedge funds were said to have been all but absent from the deal.

Hedge funds are seen as critical for getting the order flow going on accelerated bookbuilt transactions as they are able to make quick decisions. But hey have become a lot more cautious since the market correction, however, and for Hyundai Engineering, the book was still very much driven by domestic long-only funds, a source says.

ôThis is a large-cap company that is also very liquid and will allow investors to trade out quickly if they wish to do so,ö says one observer with regard to the hedge fund participation. ôThe fact that the book saw very strong demand especially from locals would have increased their (the hedge fundsÆ) willingness to participate as it shows people believe in the company and its earnings story.ö

ôAnd given the premium bid for Daewoo there is also an M&A angle to this,ö he says with reference to the ongoing attempt to sell a controlling stake in fellow construction company Daewoo Engineering and Construction.

In an M&A process similar to that expected in Hyundai Engineering later this year, Kumho Asiana Group was chosen as the preferred bidder for a 72.1% stake in Daewoo E&C in late June. According to the local press, Kumho bid W6.6 trillion ($7 billion) for the stake, which equalled a hefty PE multiple of 19 times 2006 earnings (compared with the typical 10-12 times in the Korean market) and a more than 100% premium to the W3.05 trillion market value of the 72% stake on June 9, which was the deadline for submitting a bid.

Given that the two companies operate in the same sector, the four bidders that lost out on Daewoo E&C are also likely to be looking at Hyundai Engineering and the hope is that premiums could be equally high, sources say.

Hyundai EngineeringÆs share price held up slightly better after this latest share sale, with the stock closing only marginally off the placement price at W46,500 Thursday after falling 3.13%. However, the stock is still well off its May high of W61,000, which yet again raises the question of whether the vendor may know something to suggest those higher levels wonÆt be revisted in the short term, making it safer to cash in now.

Some market watchers note though that it may be easier to fetch a high premium for the controlling stake if there is no overhang of other shares waiting to be sold and it may pay off to have cleaned up the ownership structure before that transaction takes place.

The company has also seen a sharp turnaround in its financial fortunes since the creditors agreed in March 2001 to bail it out by converting their loans into equity. The market value has increased more than 15-fold to $5.28 billion from about $370 million five and a half years ago, meaning the creditors stand to make a very healthy profit even if they settle for a few dollars less than the May record.

The companyÆs second quarter profit jumped 51% from a year ago to W114.3 billion ($119 million) on the back of a 22% rise in revenues to W1.241 trillion. According to a statement, the company received new orders worth W4.095 trillion ($4.26 billion) in the first half and expects to meet its 2006 new orders target of W8.3 trillion.
¬ Haymarket Media Limited. All rights reserved.
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