KDB to monetize stake in INI Steel

Pre-marketing begins on Monday for a 16.9 million GDR offering.

Joint leads ING and JPMorgan will begin canvassing investor opinion on Monday for a follow-on offering in the world's second largest electric arc furnace operator, INI Steel. Most of the 16.9 million shares on offer mark a divestment by the Korea Development Bank (KDB), which has held an 8.2% stake in the Hyundai group company since a debt for equity swap just over three years ago.

With one GDR equalling one share, the transaction will comprise 14.6% of INI's outstanding equity, of which the KDB stake will comprise 8.2%, other shareholders 4.3% and treasury shares 2.1%. Formal roadshows are scheduled to begin on September 29, with pricing to follow during the second week of October.

At Wednesday's closing share price of Won7610, the deal will raise $110 million including the greenshoe. Relative to the company's 52.9% freefloat, the deal will be relatively large at 27%. As such, the company hopes the removal of a share overhang will provide a platform for share price performance.

Year-to-date, the stock is up 31.21%, outperforming both the Kospi, which is up 22.29% and Posco, which is up 26.27%. Analysts say that both INI and Posco should benefit from a move back into cyclical stocks on evidence of a sustained global economic pick-up.

INI is currently valued at about 4.2 times EV/EBITDA and on a p/e ratio of roughly six times 2003 earnings. Its fortunes closely track those of the construction sector, the main client for its long steel products such as rebars and H-beams.

During roadshows investors are likely to focus on three key aspects. Firstly the extent to which increased long steel prices are already reflected in INI's current valuation; secondly, how successfully and aggressively INI will continue its de-leveraging efforts and thirdly; the level of its exposure to problems at Hyundai Card.

The company is held via a variety of Hyundai group companies including Kia Motors, the largest individual shareholder with a 14.9% stake and Hyundai Motors on 4.8%. The company got into difficulties following its merger with Sammi Steel and Kangwon Industrial.

Like its two sister companies in the auto sector, it has spent the previous few years since then attempting to turn its balance sheet round. Management have also indicated that they hope to increase the company’s dividend pay-out ratio. The stock currently yields about 2%.

INI says it hopes to bring debt to equity down from 95% in Financial Year 2002 to 85% by FY04. It intends to do so through the sale of non-core assets and partially through the forthcoming sale of treasury shares. Any remaining treasury sales post transaction will be cancelled.

Since the end of 2000, gross debt has been reduced from Won2.55 trillion ($2.1 billion) to Won2.455 trillion in 2001 and Won2.19 trillion ($1.8 billion) in 2002.