Hyundai Glovis: if at first you don't succeed

Chung family finally get the money they need to fund succession from father to son after re-launching divestment of shares in Hyundai Glovis, raising $1.064 billion.
Chung Mong-koo
Chung Mong-koo

The heir apparent and current chairman of Korea's second biggest chaebol finally managed to divest a stake in Hyundai Glovis after Thursday's close, nearly one month after the first attempt failed.

Chairman Chung Mong-koo and his son Chung Eui-sun raised $1.064 billion after selling a 5.022 million block of shares in Hyundai Glovis at Won 230,500. This represented a 2.74% discount to the stock's Won 237,000 close and just below the mid-point of a 1.9% to 4.01% range.

Chung junior sold 3.22 million shares and Chung senior 1.8 million.

Citi was once again lead manager of the transaction alongside NH Investment and Securities. The US bank is believed to have hard underwritten the deal but would not confirm whether this was the case.

If it does prove to be correct, then the secondary share sale removes one stock overhang, but potentially creates another one if investors believe Citi is sitting on a chunk of paper, which it will subsequently feed into the market.

However, observers reported a strong and oversubscribed order book with more than 100 lines between the two lead managers and a fairly even split between domestic and international investors.

"The company was pretty confident going into this deal," one observer commented. "This deal was very well flagged and the stock has come down a lot so accounts were ready and waiting for it.

He added, "There were some big domestic accounts topping up positions and the order book was well subscribed so there was no need to price at the bottom."

From the Chung family's perspective a hard underwritten transaction was nevertheless probably a pre-requisite for re-launching the deal. The Chungs had to ensure they would definitely pocket funds, which are needed to finance the succession from father to son.

They also wanted to be certain of reducing their overall stake in Hyundai Glovis before the end of this month when punitive government fines on intra-company transactions come into effect.

In return they threw investors an important sop by extending their lock-up period from six months to two years — dispelling the prospect of a new divestment any time soon. This and two other factors, which recently turned in the company's favour, are likely to have given investors more comfort than they had the first time round.

Firstly, turnover in Hyundai Glovis stock has almost doubled over the past month from 76,000 shares per day to 160,000. This means the new deal accounts for a far more easily digestible 31 days trading volume.

Secondly, the stock has also fallen quite heavily recently, making investors' in-price a lot cheaper, although this will prove to be of slight comfort if it continues to trade down. So far, this year, Hyundai Glovis has fallen 18.7%, compared to a 2% increase in the benchmark Kospi Index.

However, the big fall happened in the two days following the aborted share sale when the stock dropped 22.9%. Since then, it has stabilized around the Won 230,000 to Won 247,000 level while investors waited on the family's next move.

They were aware of the Chungs' need to reduce their stake to comply with Korea's new anti-trust regulations. One fund manager told FinanceAsia he and others had been offered private market blocks of shares at a minimum of $60 million a pop.

The new law stipulates that families cannot hold more than 30% of affiliates, which receive either more than 12% of annual sales, or Won 20 billion, from intra-company transactions. Hyundai Glovis currently derives about 70% of its revenues from Hyundai Motor group companies.

The Chungs have now avoided potential government fines by bringing down their combined stake from 43.4% pre deal to 30% post deal. However, their hold over the group remains strong thanks to a 4% stake held by the MK Chung Foundation and 5% by Hyundai Motor.

They also succeeded in a second and ultimately more important aim of raising money to complete the next step in the succession from father to son. Analysts believe Chung junior will use his share of the proceeds to purchase a 16.88% stake that Kia Motors holds in Hyundai Mobis, the key link in the group's cross shareholding structure.

This would give him a foothold in Hyundai Mobis as he does not currently own any shares and cannot buy his father's 6.96% stake without being subject to Korea's punitive 50% wealth tax. The sale would also dismantle cross shareholdings in the group and effectively turn Hyundai Mobis into a holding company as the government has been pushing for.

Hyundai Mobis would then own 20.78% of Hyundai Motor, which in turn owns 33.86% of Kia Motor.The latter also owns a 19.78% stake in Hyundai Steel.

One key decision for investors is where Hyundai Glovis is likely to fit into the new structure. Some analysts still believe it will be merged into the potentially new holding company, a potentially positive step for the stock.

In the meantime, the group recently released its fourth quarter results. These showed a 9.8% year-on-year improvement in operating profit, but a 14% drop in net profit.

This latter drop was attributed to non-operational FX losses and a higher tax rate. For 2015, management guided for 4% revenue growth.

In a research report published on January 31, UBS said the stock may benefit from a potential move to increase the dividend pay-out by as much as 50%. The bank also said the stock could be re-rated if Hyundai Glovis is able to win greater market share from the Hyundai Group in its core pure car carrier business.

It currently has a 40% market share and UBS said Hyundai Motor group management are likely to make a decision on the 2016 and 2017 financial years at the end of this year.

Other analysts have say the stock could be re-rated if Hyundai Glovis is able to increase its share of third party business particularly through M&A. At current levels, it is trading around its decade average p/e level of about 16 times forward earnings.

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