While some might question why equity partners Carlyle and Corsair would want to dilute themselves just at the point where they appear to be one the verge of selling out of KorAm Bank (see accompanying article, "Going, going, gone"), a decision has been take to proceed with a transaction which will top up the bank's tier 1 capital.
Under the joint lead management of Goldman Sachs and Salomon Smith Barney, the bank will offer 200 million new shares (plus a 20 million shoe), raising $194 million pre-shoe, based on Friday's Won12,800 close. Joint lead manager is Samsung Securities, with Credit Suisse First Boston as co-lead.
Pricing is scheduled for Thursday April 25 and subject to share price volatility over the coming two weeks, the GDR offering should come at an exceptionally slim discount to spot. Indeed, given that most investors will bet on being taken out very shortly at an attractive merger premium, demand seems likely to run away with itself.
Foreign investors already hold more than 50% of KorAm's 43.5% freefloat, with the Samsung group holding 16% and the Carlyle consortium 40.5%. Based on Friday's close, the new deal will dilute the private equity investors down to about 36.5%.
Specialists say that Carlyle and Corsair believe it makes sense to top up the capital base because it will strengthen their hand during M&A negotiations and outweigh the cost of the dilution to their current stake. Originally the consortium had hoped to avoid dilution altogether and launch a $150 million hybrid tier 1 issue, but failed to get the idea past the regulators, largely because there are no domestic regulations regarding the structure.
Were KorAm in sole negotiations with domestic banks, it would also not make much sense to raise capital since the bank would almost certainly be folded into the successful bidder. The situation changes completely, however, if there are interested foreign buyers such as Standard Chartered in the frame as well. Under this scenario, efficient capitalisation should encourage a higher price from foreign bidders keen to maintain KorAm as a stand-alone entity and in turn might prompt an even higher price from rival domestic bidders such as Shinhan, which has already raised its hand.
Currently, KorAm has an overall CAR of 11.2% and the new deal will take it just north of 12%, a recognised standard for the world's better-managed banks. More importantly, it will raise the bank's tier 1 capital from 6% to just under 7% and free it up to raise further tier 2 if necessary. During the latter half of 2001, the bank's improving profitability underpinned its capital ratios, but its rapidly increasing asset base, via the expansion of its consumer lending and credit card businesses, depressed tier 1 equity.
Unlike most other Korean banks, the Carlyle consortium made sure that KorAm took the full hit on its equity once it took over at the end of 2000 and went for full provisioning. Throughout 2001, the bank moved aggressively to clean up its balance sheet, writing off most of its W1.2 trillion exposure to founding shareholder, the Daewoo group, during the early part of the year and its exposure to other large doubtful debtors such as Hynix during the latter part of the year. By year-end, KorAm reported a loan loss reserve ratio of 95.5% against provisioned loans, compared to an industry average of 75%.
With a view to dressing the bank up sale, the partners then began the process of re-building KorAm's capital ratios and the bank launched an innovative $160 million upper tier 2 deal via Salomon Smith Barney in late November.
During roadshows, KorAm management are likely to emphasise that there is still plenty of upside in the stock price even if a strategic buy-out does not proceed. This is based on an argument that many investors have previously been looking at the bank on a straight price to book ratio, concluding that it is fairly valued at current levels. Using this ratio, KorAm is currently trading at a 1.68 times, versus 1.96 times for Kookmin, 1.87 times for Shinhan and 1.32 times for Hana.
However, officials will argue that the bank should be valued on a clean book value net of NPLs. Since most other banks have not provisioned to the same extent, pure book value is not an apples to apples comparison. Applying the same strict criteria that KorAm has used, the ratios change such that KorAm remains at 1.68 times, but Kookmin becomes much more expensive at 2.4 times, Shinhan goes up to 2 times and Hana 1.5 times.
On a p/e basis, KorAm is said to be currently trading at 6.3 times forward earnings, versus 8 times for Kookmin, 7.5 times for Shinhan and 6.6 times for Hana. On a one-year basis, the stock has returned 92.19%.
KorAm is also likely to be pitched as an attractive niche player that can add diversification to an investor's portfolio. "If an investor wants to own Kookmin and one other bank, why go for Shinhan and Hana which are simply smaller versions of Kookmin," says one country expert? "KorAm has a strong niche at the high-end of the market and is particularly strong in the Kyungi region around Inchon, a high net worth area."
As a result of moving strongly into the SME sector on the corporate lending side and shifting the balance of the bank strongly in favour of consumer lending, KorAm's asset base grew rapidly during 2001 and currently stands at W29 trillion.
"This is one of the most attractive assets in Korea from an M&A perspective," one expert concludes, "and it is an extremely rare one. It has an absolutely clean balance sheet, strong management via the ex-Citibankers who run it and at roughly $2 billion, is a perfect bolt-on size for potential acquirers. From an investor's point of view, it is also unlikely that an acquirer would leave the minorities dangling even though there is no takeover code. They will get bought out at a premium."