Hyundai Engineering block swept up at 3% discount

The $618 million sell-down by a group of creditors attracts $8 billion worth of demand.

A group of Hyundai Engineering & Construction's major creditors last night sold an 11% stake in the company in a highly sought-after deal, which allowed them to raise W779.9 billion ($618 million).

This is Korea's second largest sell-down this year after Royal Philips Electronics' $794 million exit from LG Display, which was completed on March 11, just as the Asian equity markets began the recovery that is now into its ninth week. Partly because of the improved market backdrop since then, the Hyundai transaction was able to achieve a significantly tighter discount of only 3%, versus 7.9% for LG Display.

The shares were offered at a discount range of 3% to 6% versus yesterday's close of W65,000, but the wave of demand from both domestic Korean accounts and international investors, primarily from the rest of Asia, meant the bookrunners had virtually no choice but to price the deal at the tight end. According to one source, the deal attracted about $8 billion of orders during the five or so hours that the books were open.

The market was well prepared for the deal after the creditors agreed last month that they would lower their combined stake in the company from 49.7% to 35% and although the stock is already quite liquid -- this transaction accounted for no more than eight days of trading volume based on the three-month average -- investors welcomed the increased free-float and the opportunity to buy in bulk.

Bankers note that investors are definitely more interested when the stock on offer is in a liquid name, as this increases the ability to exit at short notice. As such it is almost easier to do a large deal than a small one these days. Investors also tend to be underweight both Korea and the construction sector, which further explains the level of demand.

But one shouldn't underestimate the draw of the company itself. After being taken over by its major creditors in 2001, the construction company, which focuses on civil engineering and large industrial constructions, such as plants, has turned itself into a leading player in this industry and a major beneficiary of the construction boom in the Middle East. More recently, as the global economic slowdown has led to a weakening flow of new orders from abroad, the company has been benefitting from the government's increased spending on infrastructure.

One observer notes that because much of the company's business is focused on long-term projects, it has good revenue visibility. According to various analyst reports, the company received W3.2 trillion worth of new contracts in the first quarter and as of the end of March, it had a backlog of orders of about W44.3 trillion ($34.8 billion). Of the 34 analysts who cover the stock, according to Bloomberg, 28 have a "buy" recommendation on it.

The sellers offered approximately 12.37 billion shares at a price between W61,100 and W63,050 and, as mentioned earlier, the price was fixed at the top. Some analysts were referring to the fact that the sale may remove an overhang related to the expected sell-down, and while the stock dipped in early April, it has actually risen 11.9% in the past five days, which suggests the pressure on the share price was by no means excessive -- if indeed it existed at all. The share price has risen 69% from a low of W38,350 in late October.

The sellers were Korea Exchange Bank, Woori Bank, Kookmin Bank, Shinhan Bank, the National Agricultural Cooperative Federation (NACF), Hana Bank and Citibank. They will now be prevented from selling any more shares for the next three months. Two of the creditors -- Korea Development Bank and Hyundai Securities -- chose not to sell through this joint effort, although market watchers say KDB has been selling Hyundai shares in the open market over the last couple of weeks.

One source says Korea's top five funds are large shareholders in Hyundai's competitors and were expected to take the opportunity to add this stock to their portfolio too as the creditors were reducing their influence. Mirae Asset Investment already holds 9.8% of the company, which made it the fourth largest shareholder before last night's sale, according to Bloomberg data.

Initial estimates last night, suggested that the order book included about 100 international investors and about 80 Korean names. In volume terms the demand was split fairly evenly between international and domestic investors. Since this was a Reg-S registered deal, onshore US investors were not able to participate, but there was some interest from Europe, the source says.

Macquarie, Merrill Lynch (which is part of the Bank of America group), Samsung Securities and Woori acted as joint bookrunners and underwriters.  

The group raised some eye-brows among rival bankers, who argued that at least a couple of other banks had committed to do the trade at a tighter discount than the 6% that was offered at the wide end. While there is nothing that says a company has to focus only on the best price and fees if they invite companies to bid for a trade, this is most often what it comes down to in Korea. The creditors ran a competitive bidding process a couple of weeks ago, which is believed to have attracted four to five banks.

¬ Haymarket Media Limited. All rights reserved.
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