Korean block trades raise $582 million

KDIC sells its remaining stake in Kepco on the back of a surge in the share price to raise $260 million, while another government entity sells $322 million worth of shares in Daewoo Shipbuilding.
As the country's largest power producer, Kepco is expected to be a key beneficiary of the latest increase in Korean electricity prices.
As the country's largest power producer, Kepco is expected to be a key beneficiary of the latest increase in Korean electricity prices.

A strong day in the Korean stock market on Tuesday prompted two government-linked entities to sell shares in a couple of large Korean bluechips after the close, raising a combined $582 million.

The Financial Services Commission (FSC) offloaded a 5% stake in Daewoo Shipbuilding and Marine Engineering, raising W342.2 billion ($322 million), and Korea Deposit Insurance Corp (KDIC) pocketed W277.4 billion ($260 million) from the sale of its remaining shares in Korea Electric Power Corp (Kepco) through a tightly priced block trade.

Both deals attracted good demand, but the interest in the Kepco offering was particularly impressive since the share price finished Tuesday’s session 6.9% higher. The gain came after the government announced late in the session that electricity prices will be increased by an average 5.4% this week to help cool the strong demand for power that is resulting in frequent power shortages.

The rally pushed Kepco’s share price to its highest closing level since early May and essentially wiped out the entire intended discount. Even so, the deal was priced at a zero percent discount to the close, suggesting investors believe Tuesday’s gain wasn’t a one-off and that the tariff increase will have a positive long-term impact on Kepco’s earnings.

Korea was the best performing among the major Asian stock markets on Tuesday with the benchmark Kospi index closing 1% higher in its fourth straight day of gains. The rest of the region finished mostly up as investors continued to digest the potential impact of a range of economic reforms out of China and the recent comments in favour of continuing the US stimulus programme from Janet Yellen, who is nominated to take over the helm at the Federal Reserve after Bernanke.

Hong Kong’s Hang Seng Index finished flat, however, after adding 5.3% in the past three sessions.

Daewoo Shipbuilding may have been the larger of the two deals, but Kepco hit the market first, about 15 minutes after the close of the Korean market or around 3:15pm Hong Kong time.

KDIC, which is responsible for insuring bank deposits and also holds stakes in various Korean banks and companies that were taken over by the government as part of the restructuring of the financial sector after the Asian financial crisis, had been expected to sell its remaining 1.36% stake in Kepco ever since its previous sell-down in October last year.

And having achieved a 3.9% discount last time for a $547 million deal, sources said it was looking for a discount of no more than 4% for this smaller transaction — never mind that the share price was up 6.9% on the day.

That ambition could have toppled the transaction, but as it turned out the seller had read the sentiment correctly and the electricity price increase in combination with the fact that this was a clean-up trade resulted in plenty of demand.

KDIC, through its wholly-owned subsidiary Korea Resolution & Collection Corp, offered its remaining 8.7 million Kepco shares at a price between W30,576 and W31,850. The range translated into a discount of 0% to 4% versus Tuesday’s close of W31,850 and to put it into further context, the stock hasn’t finished above W30,500 since September 13.

But despite that, the bookrunners were able to fix the price at the top of that range for a 0% discount.

A strong reception from domestic Korean accounts played a big part in being able to move the price up the range and, according to one source, about 60% of the shares was allocated to Korean investors. However, the deal was also heavily subscribed by foreign investors across the range and could have been completed without any involvement by Korean investors at all, the source said. In all, about 80 foreign accounts participated in the deal.

There was no information about the breakdown between long-only money and hedge funds, but the top-10 orders were said to be skewed towards long-only investors.

The demand was not dissimilar to what KDIC saw for its previous block trade in Kepco just over a year ago. That deal was upsized by more than 100% but as a trade-off the price was fixed at the bottom of the marketing range.

The latest deal accounted for eight days of trading, based on the average daily volumes but excluding the heavy trading on Tuesday when close to 6 million Kepco shares changed hands.

The investor enthusiasm remained intact after the deal was completed with Kepco’s US-listed American depositary shares rising 6% to $14.96 in US trading overnight. The fact that the KDIC overhang has been removed may have contributed somewhat to the buying frenzy, although arguably analysts were already overwhelmingly positive on the Kepco stock in its own right.

Of the 32 analysts who cover the company, according to Bloomberg data, 29 have a “buy” rating on the stock and the current average 12-month target price of W37,100 implies a 16.5% upside from Tuesday’s close.

Citi, Deutsche Bank, Shinhan and Woori were joint bookrunners for the transaction. The same banks also arranged the Kepco block in 2012 and sources said they had been mandated for this final leg of the sell-down for quite some time.

Daewoo Shipbuilding
The second deal was done rather differently as it was offered at a fixed price. And hence investors only had to make one choice — take it or leave it. The deal launched slightly later than the Kepco block, at 3:30pm Hong Kong time and closed 15 minutes earlier at 6:45pm.

The FSC offered to sell approximately 9.57 million shares, which accounted for 5% of Daewoo Shipbuilding and about 29% of the total stake it holds in the Korean shipbuilder.

The shares were offered at a price of W35,550 each, which translated into a 3.9% discount versus Tuesday’s close of W37,000. This is believed to have been the minimum price that the FSC — a consolidated policy-making body for all matters pertaining to supervision of the Korean financial industry — had approval to sell at.

Daewoo didn’t have as strong a day as Kepco before the launch. In fact, it ended 0.8% lower after trading off into the close and after gaining a combined 9.2% in the previous two days. However, it has had a good run this year amid a recovery in the industry and the accumulation of new orders. Before the deal it was up 36.3% year-to-date and was trading only slightly below the 2013 high of W38,400 that it hit in mid-October.

Still, the slight drop right before the transaction would have made the discount a bit more attractive.

A source said the deal was multiple times covered with orders from around 50 investors. About two-thirds of the demand came from domestic accounts, while foreign long-only and hedge fund investors made up the rest.

According to the source, the FSC has been looking to sell its 17.15% stake in Daewoo Shipbuilding in one piece through a trade sale. But since it isn’t a controlling stake and has no real strategic value, it hasn’t been able to find a buyer.

The block trade offered a chance to take some money off the table at least and it is reasonable to suspect that the FSC will return to the capital markets again to sell the rest in due course. It will still own about 12.15% of the company following this deal, which based on the placement price is worth about $782 million. Its remaining shares will be locked up for 90 days.

The deal was arranged by Credit Suisse and Hyundai Securities.

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