Korean giant to list

Samsung Life, non-Japan Asia''s biggest insurer, looks set to IPO in the second half. But just how big will the deal be?

Its IPO will be a boost to the Korean equity markets, but the question is by how much? Samsung Life, Korea's biggest insurer is preparing a domestic IPO before year end and ADR in 2004, but in spite of its size and blue chip calibre, almost no one can put an exact figure on what the market capitalization of the company will be.

The consensus we received from actuarial consultants and investment bankers was that a market capitalization of between $8-15 billion may be about right.

That would place the company among Korea's top five by market cap somewhere between POSCO and KT.

Considering its size, it may surprise some that Samsung Life is not listed already. The company has $58 billion of assets and ranked 15th in the AsianInvestor 100 we published earlier this year. Indeed, the only institutions above it in this list were central banks, and state pension funds. It is thus the biggest insurer in non-Japan Asia.

No surprise then that it has a dominant position in Korea, with 45% market shares in its core businesses. And as one head of a foreign universal bank put it: "It is not just a question of its market share alone. It has all the best customers. You cannot compare any of the other life insurers to Samsung Life in terms of quality."

Samsung Life, almost uniquely among Korean life insurers, has no issues with its solvency ratio, being in fact in positive territory. It has shareholder funds of $4.8 billion as of the end of March

The nearest listed comparable to Samsung Life in Asia would be Cathay Life, which has a similar market leading position in Taiwan. It has a market capitalization of $10.5 billion although its asset size at $32.7 billion is almost half that of Samsung's.

Another comparable is with sister insurer, Samsung Fire & Marine which has a market cap of roughly $3 billion, and according to Samsung Fire & Marine's own IR people is 10 times smaller than Samsung Life.

One benchmark we have may in fact be the OTC market. In the highly illiquid (and somewhat unrepresentative) OTC market, Samsung Life's shares trade at W200,000. At this price it would equate to a market cap of W4.4-4.8 trillion. However, when Samsung's Lee family pledged shares in Samsung Life to the creditors of Samsung Motor in 1998 they did so at a valuation of W700,000 a share, which equates to a market cap of W15.4-16.8 trillion, a number which is more in line with the afore-mentioned consensus estimates.

The domestic IPO is expected by year end and is likely to be for 10% of the company. This would equate to at least a W1 trillion issue. Foreign investment bankers reckon an international deal will follow next year, probably for a further 15%.

Why now? The reasons behind the timing are partly fiscal and partly driven by creditors. In the case of the first, local sources say that Samsung Life undertook an asset revaluation exercise several years ago, the penal impact of which will be a severe tax hit if it is not a listed company by the end of this year. Likewise the creditors of Samsung Motor are keen to liquidate their positions and want the stock listed.

Meanwhile, the pressing nature of the timetable has added a unique twist to the story. About seven years ago, Samsung Life mandated Tong Yang Securities to lead manage the eventual IPO. The reason for this was due to historical ties between the two groups and in particular, a marital tie between a senior figure at Tong Yang Securities and the Lee family.

Seven years on, and Tong Yang Securities is now ranked as Korea's 10th biggest broker. However, according to Korean securities laws, if you change your lead manager before the IPO it means delaying the IPO for a year.

Obviously, Samsung cannot delay the IPO for a year for fiscal reasons, so will have to go ahead with the year's biggest Korean IPO with a lead manager that very few people outside of Korea will have heard of. It is reckoned that its very own Samsung Securities will have to do much of placement, probably as a joint underwriter (similar to its role on the Samsung Card going public bond).

Adding a further twist to the deal is another Korean regulation. The lead manager of a domestic IPO in Korea must undertake to buy back every single share of the IPO if the stock falls 10% within the first month of trading. The lead must support the price at this level. This exposes the lead to enormous underwriting risk, and on a W1.5 trillion IPO that is a big risk for Tong Yang Securities. This is especially so since from a trading perspective the whole market knows if they sell at 95, they can buy back the stock from an overwhelmed lead manager at 90.

Play it again, Samsung

This is not the first time Samsung Life has talked about listing. In 1999, there was also a planned IPO. However, the deal had to be postponed due to, once again, a regulatory problem.

Like all such life companies, there is an issue in Samsung Life of what is owned by the shareholders (mostly the Lee family) and what is owned by the policyholders. This is because over time a fund (known as a balancing fund) is built up which is designed to smooth returns for policyholders in good and bad times. The company itself has taken risk to build this fund but whether it belongs to the shareholders or the policyholders is a subject of debate the world over.

In 1999, the Korean regulator declared that 90% of these funds should revert to policyholders, a decision that led the family shareholder to cancel the IPO - since so much value would be lost to the shareholders.

One reason why the IPO seems more likely this year is that a deal seems to have been struck in the Korean legislature to split this so-called "free estate" on 50/50 basis between policyholders and shareholders. This appears to be acceptable to both sides.

However, going back to the issue of valuation, how you value the balancing fund and how it is split will have a material effect on the listed company's market cap.

So until more clarity ensues on this latter point, detailed forecasts of the size of the IPO and the subsequent market cap will remain hard to make.

One thing is clear: it can only be good for Korea's capital market to have a company of Samsung Life's quality listed and few are in doubt that it will prove a magnet for more foreign funds to enter Korea.