The future ownership structure of Hana Bank became clearer on Friday after the government-owned Korea Deposit Insurance Corporation (KDIC) divested its entire 22.23% stake in the bank through an institutional bookbuilt deal led by UBS. The 42.756 million share deal raised $930.2 million and removed a major overhang from Hana, which has the most fragmented shareholding structure of the entire Korean banking sector.
As a result of the deal, Hana now has a freefloat of about 65%. However, about 25% of the remaining share capital is still potentially available for sale. Hana management are sitting on a block of just over 10% in Treasury shares and are said to remain in negotiations with a couple of potential strategic investors including Singapore government investment arm, Temasek Holdings.
Allianz AG, formerly the largest shareholder, is also believed to be considering divesting its stake entirely. It recently sold down from 7.5% stake to 5.38% in a block sale led by UBS.
So too, the second major shareholder, Dongwon is said to have recently sold down a 5.11% stake to nearer 4%.
This leaves three other major shareholders with stakes of more than 3% including Posco and Kolon. Specialists say all three have been waiting for the KDIC sale to clear the market before making preparations to sell as well.
For Hana management, their guiding principle throughout the whole process has been how to retain control. Aside from the Treasury shares, management control a block of about 10% of shares and want to find a friendly strategic partner that can ideally provide some technical assistance, but more importantly make sure the current management team remains in place.
Observers say that originally management wanted to make sure they could buy back the KDIC block in order to control the divestment process. Under the terms of an agreement forged in 2002, when Hana took over Seoulbank, management were scheduled to start buying back shares from KDIC in June 2003.
However, the first payment date co-incided with the problems at the SK group, to which Hana was the major domestic creditor. The bank was, therefore, unable to buyback shares without severely breaching its capital ratios.
Instead a second agreement is said to have been negotiated between KDIC and Hana, with former CFO Kang Lee leading discussions on behalf of the bank. Full details of the new agreement have never been made public.
Initially, it was supposed that the whole timetable was simply set back a year. But specialists say the new agreement allowed KDIC to sell a 12.36% block at any time, with Hana holding a call option over the remaining 9.33%.
Critically, the call option could only be exercised after June 1 2004. Were KDIC were to sell the 12.36% block before that date, it also had the right to sell the remainder too.
In late February KDIC invited investment banks to pitch for a block sale and mandated UBS in mid March. Shortly afterwards Hana CFO Kang Lee was moved to the risk management division by SY Kim, the bank's influential CEO.
Hana appeared to have lost control of the process. But the second KDIC agreement had a number of terms and conditions that provided additional protection for Hana. One of these stated that KDIC could not sell shares to a single investor in a larger block than that owned by the existing second largest shareholder - Dongwon.
Hence the UBS sale was structured as true institutional bookbuild and followed the same format as a sale earlier this year for Shinhan bank. Both deals were launched and priced after the market's close, then had to be crossed from the vendor to the new investor base in a one hour time slot before the market's open the following trading day.
Books were held open for two-and-half hours after Wednesday's close. Because Hana had recently cancelled some Treasury shares, the exact amount for sale was 22.23% rather than the 21.66% initially envisaged.
Alongside UBS, Daewoo was joint-lead and placed about 10% of the deal in the domestic market.
The shares were pitched in a range of Won24,800 to Won25,800, representing a 2.1% to 6% discount to the stock's spot close. Pricing was completed at Won25,050, representing a 4.9% discount to spot.
This discount is steeper than the 2.78% level Shinhan achieved in March. However, at $533 million, the Shinhan deal was almost half the size, completed in far more bullish market conditions and did not weigh so heavily on the outstanding stock. It represented 24 trading days, whereas Hana came in at 47.5 days.
Books were closed one-and-a-half times oversubscribed - a level that would ensure allocations remained tight. As one observer puts it, "The Korean bank market is not one that everyone plays. Investors were pretty much asking for the stock they wanted."
Final allocations show participation by 94 international investors, of which about 60% were thought to be new to the stock. There were a couple of orders for more than $100 million, but no one account was allocated more than 3% of the deal.
By geography, 39% went to Asia, 32% to Europe and 29% to the US. By account type, 55% was long and 45% hedge.
The sale was completed a day before parliamentary elections, then crossed when the market resumed trading on Friday. Its success stands testament to investors' lack of concern about the outcome, or the impeachment debate surrounding President Roh.
At the end of Friday's trading, Hana's share price remained above issue price, but slipped 3.2% on the day to close at Won25,500. At this level, the bank is trading at 1.1 times 2004 book based on Hana's own valuation of Won23,000 per share.
Shares are up 15.91% year-to-date, but down from a high of Won29,050 in early March. Current levels represent a discount to the sector leaders Kookmin and Shinhan, which are trading at respective price to book valuations of about 1.5 and 1.3 times 2004 earnings.
The final outcome would appear to have satisfied everyone. The government is likely to be pleased it has completed another successful divestment and booked a profit on the shares.
Hana, meanwhile, has staved off the prospect of a potentially hostile majority shareholder and is now free to negotiate the sale of the Treasury shares as it wishes. It only loses in one key aspect - had it been able to re-purchase the Treasury shares at the previously negotiated level of Won18,830 and then sold them at a profit, it could have booked the difference and improved its tier 1 capital ratios.
Outside observers believe Temasek is still the most likely acquirer of the Treasury shares as it would hold the stake as a passive investment. Because Temasek is classified as a non-financial entity, its ownership is also constrained.
Legally it would only ever be able exercise voting rights on a maximum 4% stake and cannot purchase more than 10%. This stipulation harks back to the days of chaebol control and the government's concern to prevent one of the chaebol from gaining hold of a major domestic bank and using it as a private funding arm.
Temasek has filed with Korea's FSC to increase its stake a further 6.39% above the 3.6% it already holds. This filing is still active and pending government approval.
Commenting on the equity sale, Jae-Hong Lee, country head for UBS in Korea notes that the deal is the largest block trade in Korean history. He says, "It's an extremely meaningful transaction. It underlines the government's commitment to the privatization process and its success provides the groundwork the next divestment.
"This transaction was executed under a very rapid timeframe but attracted strong demand from global investors," he adds. "It has diversified Hana's institutional investor base in the way the bank was hoping and now leaves management free to formulate future strategy using the treasury shares."