KCC exits Mando

KCC exits Mando via $597 million placement

KCC initially planned to sell about half its stake in the Korean auto parts manufacturer, but strong demand allowed the deal to be upsized by close to 100%.
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Mando's biggest customer is Hyundai-Kia (AFP)
<div style="text-align: left;"> Mando's biggest customer is Hyundai-Kia (AFP) </div>

Construction materials manufacturer KCC Corp raised W635.5 billion ($597 million) yesterday through the sale of its remaining 17% stake in Mando Corp, a Korean auto parts maker. The pre-IPO investor took advantage of a stock market rebound in Korea and the rest of Asia yesterday following two days of sharp declines on Monday and Tuesday and managed to cash out as the stock trades at near-record highs.

This was the third Korean block trade in the past week, following sell-downs in KB Financial and Shinhan Financial, and confirms that investors are still happy to increase their exposure at the right price. However, it also shows that sellers need to be able to react quickly to make use of small windows of opportunity, as markets remain volatile and very headline-driven.

KCC initially approached the market with about half its remaining stake, or 1.6 million shares, but good anchor demand from several funds meant that deal was covered within 90 minutes. Hence, in the early evening Hong Kong time, a decision was made to essentially double the deal to 3.1 million shares, allowing KCC to make a clean exit. This should be positive for the stock since it prevents the creation on an overhang, which may have been the case had the KCC been left with just over 8%. The construction materials manufacturer was a financial investor in Mando and had been widely expected to sell at some point. Indeed, analysts have warned about an overhang issue in the past, but in light of how the share price has performed, it is difficult to see that it has had much impact.

Despite the size increase, J.P. Morgan, which acted as the sole bookrunner, was able to push the price above the mid-point of the indicated range for a final price of W205,000 and a discount of 6.8% versus yesterday’s closing price of W220,000.

While significantly wider than the 3.2% discount that Kookmin achieved on its $1.71 billion sell-down in KB Financial last week, the two stocks have had a completely different performance in the run up to the deal. KB Financial has been on a declining trend since the beginning of this year and even with a slight rebound since mid-June, the share price had lost close to 8% since the deal was first flagged in early April. Mando, on the other hand, has gained 69% this year and is up 165% since its IPO in May 2010. Yesterday’s close was just 1.3% below its all-time closing high of W223,000, which it hit on July 1.

The shares were offered in a range between W200,500 and W209,000, which corresponded to a discount of 5% to 8.9%. The deal accounted for about 20 days worth of trading volume.

According to a source, about 60% of the demand came from international investors, with domestic Korean accounts making up the rest. The international buyers included both long-only funds, some of which came in with “chunky” orders, as well as hedge funds. In all, more than 80 investors participated in the transaction.

Analysts generally like the company, which specialises in the manufacturing of brakes, steering and suspension systems, because of its strong growth prospects and continuing shift into more advanced products with higher margins. Of the 20 analysts who cover the stock, 15 have a “buy” recommendation on it. However, several banks, including Goldman Sachs, Citi and Nomura have lowered their recommendations from “buy” to “hold” in the past few months because they felt the company was fairly valued. Even so, the share price has continued to gain and investors clearly thought the discounted price was attractive enough for them to buy.

The portion of Mando’s shares held by non-Korean investors has increased steadily from below 5% at the time of the IPO to more than 20% now.

Mando is a key supplier to the Hyundai-Kia Automotive Group, which is its largest customer. However, it has been actively diversifying its customer base in recent years and also supplies General Motors, Ford and Chrysler, as well as some European brands and car manufacturers in emerging markets like China and India. In January, it agreed to set up a joint venture with China Geely Automobile, which will supply modules and brakes for Geely’s passenger cars, starting in 2012.

The company was founded in the early 1960s as part of Korea’s Halla Group, but was divested when the group collapsed during the Asian financial crisis in 1997. In 2008, a consortium led by Halla Engineering & Construction Corp bought 72.4% of Mando for about W651 billion ($686 million) from an investment consortium led by J.P. Morgan Partners and Affinity Equity Partners, allowing the Halla group to regain control of the company. The buying consortium also included Korea Development Bank, the National Pension Service and KCC.

KCC invested about W260 billion and became the second largest shareholder with a 29.99% stake. It sold a portion of that stake as part of Mando’s $436 million IPO last year, which left it with the 17.1% it held before yesterday’s sale.

In September last year, two other pre-IPO investors, H&Q and KDB Private Equity, sold their combined 18.6% stake in Mando through a block trade that raised a total of $359 million. That deal, which was led by Citi, Macquarie and Morgan Stanley, was priced at W124,500, which represented a 4.2% discount to the market price at the time. By holding on to its shares, KCC was able to make an additional return of 65% compared to what it would have made had it sold at the same time.


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