Bobcat IPO pricing marks Doosan's loss

Korean chaebol accepts an IPO price that values Bobcat at barely half the cost of the original 2007 acquisition.
Doosan tries to dig itself out of a financial hole
Doosan tries to dig itself out of a financial hole

After one false start in October, Korea's oldest industrial conglomerate completed the first stage of an initial public offering for Doosan Bobcat on Friday.

A scaled-backed 30.028 million share offering for the US farm and construction equipment manufacturer was priced at W30,000 per share, potentially raising W900.85 billion ($788.74 million) once the domestic retail offering is completed on Wednesday.

This values the company at $2.629 billion based on the issuance of 30% of the company's share capital. 

More strikingly, this level is 46.4% lower than the $4.9 billion price tag Doosan successfully bid for Bobcat in June 2007 when it agreed to buy the North Dakota-based company from Ingersoll-Rand. 

The IPO valuation serves as yet another reminder of just how badly Doosan misjudged the timing of the original M&A deal, which was struck as the US sub-prime mortgage market was already imploding and the global financial crisis about to hit its stride. 

Unlike competitors such as Caterpillar, Bobcat specialises in smaller machines used for house building and sales have now recovered to pre-financial crisis levels.

In 2015, the company booked revenues of W4.04 trillion ($3.54 billion) and operating profit of W385.6 billion ($337.5 million) compared to respective 2006 figures of W3.7 trillion and W283 million according to S&P Capital IQ figures.  

However, the balance sheet of its parent Doosan Infracore has not fared so well and analysts believe the IPO proceeds will not be sufficient to fully alleviate its problems. 

It is an irony which will not be lost on many Korean financial markets participants since Doosan Infracore itself was founded from the ashes of Korea's largest ever bankruptcy after the Daewoo chaebol collapsed under the weight of $73 billion debt in 1999. Doosan purchased Daewoo Heavy Industries and Machinery in 2005 and re-branded it Doosan Infracore.

A desire to maximise IPO proceeds for debt re-payment is one reason why Doosan Infracore originally pushed for a top end valuation of $4.3 billion for Bobcat. Its first attempt to float the company on an indicative price range of W41,000 to W50,000 per share collapsed in early October.

Since then, the all secondary share deal has been restructured and Doosan Infracore has cut its stake sale from 27% to 10.9%, while Doosan Engine has cut its from 4.1% to 1.3%. A 17.9% divestment by a group of pre-IPO financial sponsors remains unchanged. 

Super-jumbo order anchors book

Syndicate bankers said the second bookbuilding exercise went well largely because the entire international tranche had already been covered by anchor demand prior to its re-launch on Thursday.

This was undoubtedly aided by the fact that one US anchor investor subscribed for a $130 million ticket, which will be made public when the group lists on November 18.

Bankers estimate that international investors will end up owning roughly 60% of the overall deal; the majority as part of the institutional placement, which accounts for 50% of the transaction and the rest from the employee share option plan, which accounts for a further 20%.

Retail investors will be allocated 20% and domestic high yield investment trusts the remaining 10%. 

When the deal was re-launched, investors were sent a term sheet with an indicative range of W29,000 to W33,000 per share.

"We went out with this range because this is where we’d re-filed the deal at," said one specialist. "But we verbally told accounts we were re-building the book on a fixed price of W30,000."

Bankers said there were about 110 lines in the domestic order book, roughly three times the level of the international order book. 

Re-pricing the deal slightly below where domestic institutions had bid for paper during October’s first book build was probably a good strategy to re-pique their interest in what could have easily been viewed as a tainted offering. 

The presence of one super large investor will also have anchored it in more ways than one in a week likely to be dominated by the uncertain outcome of the US presidential election.

It also effectively reduces the freefloat by just over 5%. This should re-assure investors there will be less loose paper during initial secondary market trading. 

At W30,000 per share, the deal has been priced at 10.4 times forecast 2016 EV/Ebitda and 6.9 times 2017 according to one syndicate broker. By contrast, the average ratio for US machine and equipment companies stands at about 11.5 times on a 2016 basis.

Balance sheet remains stretched

In a pre-deal analysis, non-syndicate broker Citi concluded that the revised price range represented value. However, it also said that even after the IPO proceeds have been booked, "the parent level balance sheet will remain stretched with an interest coverage ratio below one times."

According to S&P Capital IQ data, this was only 0.7 times at the end of June, while total debt to Ebitda stood at 10 times and net debt to Ebitda at 8.8 times.  Free cash flow amounted to $460 million after taking interest payments into account. 

The group has two big re-payments looming: a $350 million 4.5% eurobond that matures on November 23 and a $500 million 3.25% hybrid that becomes callable and puttable in October 2017. 

The group's de-leveraging efforts have also recently included the W1 trillion sale of its machine tool business. 

Doosan Infracore’s share price bounced back strongly after the de-leveraging plan became clear, closing Friday at W7,170, up 51.6% year-to-date. However, in line with the revised IPO valuation, it has dropped 13.4% since a year-to-date high of W8,220 on October 6. 

When it first launched Bocat's IPO, Doosan had ambitions to execute Korea’s largest flotation since Samsung Life's $4.4 billion deal in 2010. However, it has not only been eclipsed by the recent $1.97 billion spin-off of Samsung's biologics arm, but also Cheil Industries $1.37 billion IPO in December 2014.

Nevertheless, Doosan Infracore is likely to be extremely relieved it has been able to put the second stage of its restructuring plan in place.

Likewise, while it clearly overpaid for Korea’s largest outbound M&A transaction in 2007, it does now own an asset, which is core to its profitability and doing well.  

At the end of June, Bobcat reported sales of W1.1 trillion compared to its parent's W1.62 trillion level and operating profit of W149.1 billion against Doosan Infracore's W173.5 billion. 

IPO investors are likely to have been drawn by management's guidance for a strong second half. During the first six months of the year, Bobcat's operating income rose 13.6% year-on-year, while its operating margin expanded quickly from 8.8% in the first quarter to 13.4% in the second.

This was driven by the US, which accounts for about 70% of overall sales.

As a result of the deal, Doosan Infracore is reducing its stake from 70.3% to 59.3% and will be subject to a one-year lock-up from the trade date. 

Lead underwriters on economics of 35% each were JP Morgan and Korea Investment & Securities. Joint bookrunners were Credit Suisse, Hanwha Investment and Securities, HSBC and Shinyoung Securities.

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