Korea Electric Power Corp (Kepco) held up well yesterday even though the share sale by Korea Deposit Insurance Corp (KDIC) on Tuesday evening was upsized to $547 million from an original base deal of $235 million. The share price fell 3.7% to within 50 points of the placement price in the first 15 minutes of trading, but bounced back to trade around 2.8% lower for most of the day, suggesting a successful transaction.
However, the execution was anything but smooth and it took until 4am (Hong Kong time) for investors to get their allocations — even though the order books closed at 8pm. Sources close to the deal said the delay had nothing to do with the level of demand, but rather it was caused by lengthy discussions between the four bookrunners on how to divvy up the shares.
Still, whatever the cause, it meant that the deal wasn’t completed before Kepco’s American depositary receipts (ADRs) started trading in New York at 9.30pm, leaving the bookrunners — and the seller — open to the possibility of investors withdrawing their orders in case the ADR price were to fall substantially.
This was the second time in just two weeks that a Korean block trade failed to get done before the US open and, last time, when SK Telecom attempted to divest part of its stake in Korean steelmaker Posco, the deal was eventually pulled after Posco’s ADR price fell 4.4% in the first 10 minutes of trading. It isn’t entirely clear whether there was enough demand to cover that deal anyway, but clearly the drop in the ADRs didn’t help and, according to sources, the order books had closed as planned at 8pm, suggesting that the bookrunners saw no need to keep them open a bit longer.
This time too, Kepco’s ADR price took a hit, falling 4.4% immediately at opening and eventually finishing the session 4.6% lower. However, the bookrunners had supposedly reconfirmed all the orders at the larger size before the New York opening bell and the deal held together. Still, the fact that it is taking so long to wrap up and allocate these deals is causing confusion and late last night there was a rumour in the market that there may not be enough demand to cover the huge upsize option. This turned out not to be true, but it does show the potential danger of a delay when it comes to pricing and allocating a deal, whatever the cause. It is a particular concern when it comes to major Korean companies, since so many of them have US-listed ADRs.
The joint bookrunners — Citi, Deutsche Bank, Shinhan and Woori — initially went out with a deal size of up to 9.67 billion shares which at the implied price range translated into a deal size of between $225 million and $235 million. However, the deal also came with an open upsize option, which suggested that KDIC might be looking to sell its entire 5% stake (equal to about $750 million at the bottom of the range) if there was sufficient demand. That did seem somewhat ambitious though, since the base deal represented just a 1.5% stake, and most investors were probably expecting a final deal size somewhere in between.
The shares were offered at a price between W25,900 and W26,950. The top of the range was equal to Tuesday’s closing price, while the bottom represented a 3.9% discount.
According to a source, the seller wasn’t too fussed about the price, but was keen to sell as many shares as possible and when the bookrunners went back to investors to check that they were okay with the increased deal size, they also told them that the price would be fixed at the bottom for the maximum 3.9% discount.
Following the upsize, KDIC, through its wholly owned subsidiary Korea Resolution & Collection Corp, sold 23.5 million shares, which was equal to 3.7% of Kepco’s outstanding share capital. At the final price this resulted in a total deal size of W608.65 billion ($547 million). KDIC will still own approximately 1.3% of Kepco after this deal, which based on yesterday’s closing price is valued at close to $200 million. Those shares will be locked up for 120 days.
KDIC is responsible for insuring bank deposits and also holds stakes in various Korean banks and financial institutions on behalf of the government that were taken over as part of the restructuring of the financial sector that took place after the Asian financial crisis.
According to sources, the deal had a slow start but the bookbuilding started to gain momentum following a few chunky orders from Korean funds. When the books closed after about four-and-a-half hours it was multiple times covered at the base size and well covered at the final size. Some investors did feel that the increase of the deal size was too big and decided to reduce or withdraw their orders, but there were supposedly also investors who increased their orders. In all, the demand remained largely the same and the final tally showed just under 100 lines in the order book.
About 70% of the shares, or about $400 million worth, went to domestic investors. International investors were scaled back by up to 50% in some cases and ended up with just below $150 million worth of shares. One reason for that, one source said, was that most of the international demand came from hedge funds, while the domestic demand came predominantly from long-only funds that were already shareholders in Kepco and hence were seen as less likely to flip the shares immediately.
Most of the international demand came from Asia, but there were also some orders from the US.
Kepco’s share price held up into the close yesterday and finished the day 2.8% lower at W26,200 — about 1.2% above the placement price. The benchmark Kospi index fell 1.6%.
SK Telecom returned to the capital markets this past weekend, selling $391 million worth of Posco shares with the help of Morgan Stanley. The sale was done as a club deal, targeting only a handful of investors, and was slightly larger than the up to $324 million it had sought to raise from the block trade that got pulled a week-and-a-half earlier.