Kepco block

Kepco trims stake in maintenance unit, raises $97 million

The Korean power producer sells a 5% block in Kepco Plant Service & Engine on a day when global investors are focused on the US government’s sell-down in AIG.
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Kepco Plant Service & Engine (KPS), which provides maintenance services for power plants and other industrial plants
<div style="text-align: left;"> Kepco Plant Service & Engine (KPS), which provides maintenance services for power plants and other industrial plants </div>

It didn’t turn out to be as busy a start to the week as market participants expected when stocks rallied at the end of last week, partly because weak China trade data dampened the enthusiasm a bit. Global investors were also busy on Monday assessing the US Treasury’s massive sell-down of its stake in American International Corp (AIG), making it tough for smaller deals to compete for attention.

The AIG block was priced at $32.50 per share early yesterday morning for a total deal size of $18 billion, of which AIG itself bought approximately $5 billion worth of shares. Overnight, the underwriters also exercised the overallotment option, increasing the total deal size to $20.7 billion. As a result of the transaction, the government’s stake in AIG will fall to 15.9% from 53.4%.

However, one deal did take place in Asia on Monday night — a small placement of existing shares in Kepco Plant Service & Engine (KPS), which provides maintenance services for power plants and other industrial plants. Its main focus is turbines, generators, motors, pumps and boilers. KPS is majority owned by Korea Electric Power Corp (Kepco), which was the seller of the block.

The deal saw a good turnout from local Korean investors, but with a fairly aggressive price range to begin with, as is often the case for Korean blocks, the price was fixed at the bottom for a total deal size of W110.25 billion ($97 million).

Kepco offered 2.25 million shares at a price between W49,000 and W51,000. The top of the range was equal to Monday’s closing price, in other words it offered a zero percent discount, while the bottom translated into a 3.9% discount.

However, even 3.9% was not that generous for a stock that isn’t particularly liquid. Monday’s transaction accounted for just 5% of the share capital, but 20 to 25 days of trading volume, depending on which period you look at. A key reason for the thin trading is that the stock isn’t widely held. Indeed, Kepco itself owned 75% of the company before this deal. With its stake falling to 70% as a result of this transaction, the liquidity should improve somewhat.

The share price has also had a strong run in the past 12 months. Before the launch of this block, it was up about 85% since late September last year and was trading at its highest levels since January 2011 (it hit a 2012 high of W51,500 on August 29).

The share price did take a hit after the deal though, falling 7.4% to W47,250 yesterday. That left it 3.6% below the placement price of W49,000.

According to a source, about 70% of the demand came from Korea-based investors, which wasn’t really a surprise, given that KPS is a fairly local stock that doesn’t count that many international investors on its shareholder register. The rest of the demand was split fairly evenly between international long-only accounts and hedge funds, perhaps with a slight overweight in favour of hedge funds. About 30 investors participated in the deal. One source noted that many investors don’t know this stock at all, while others like it a lot.

Analysts are also mostly positive on the company’s outlook. Of the 19 analysts who cover the company, according to Bloomberg, 19 have a buy recommendation on the stock.

The deal was jointly arranged by Citi, Daewoo Securities and Samsung Securities.

¬ Haymarket Media Limited. All rights reserved.

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