Korea's MMAA divests Kumho Tire stake

Military Aid Association sells out of Kumho Tire.

Korea's Military Mutual Aid Association (MMAA) divested its remaining 15% stake in Kumho Tire on Friday, raising $158 million from the sale of 10 million shares.

The JPMorgan-led deal followed a placement one-day earlier involving parent Kumho Industrial. This saw the latter re-purchase a 10% stake from MMAA under the terms of a call option embedded in Kumho Tire's dual listing earlier this year on the London and Seoul stock exchanges.

The two secondary sales mark end to MMAA's two-year investment in Kumho Tire, with Kumho Industrial now becoming the major shareholder again. The exercise of the call option (at a strike price of roughly Won13,500 compared to an IPO price of Won14,650) sees it climb from a 21% to 31% stake.

Friday's public placement has expanded the freefloat from 29% to 44% and represents 30 days trading. It has also removed a major overhang from the stock, although a further 14% is still held by former creditors, who are likely to want to cash out at some point soon.

The IPO lock-up expired in mid-August. The remaining 11% of the company's equity is held by US tire manufacturer, Cooper Tire, which took a strategic stake at IPO.

The placement was marketed at Won16,000 to Won16,200 per share - a 4.2% to 3% discount to the stock's Won16,700 close on Friday. After a three-hour bookbuild, the deal was priced at Won16,200 per share, although books were left open until New York began trading.

The final order book is said to have closed just over three times covered with participation from about 50 accounts, of which roughly one third were from Korea and the rest international.

Observers report a number of large orders including one for one third of the deal. "It's quite difficult to allocate Asian deals these days," says one specialist. "Order sizes have definitely trended much higher relative to deal size over the past few years."

At Won16,700, Kumho Tire is currently trading at about 8.5 times 2005 earnings and has risen roughly 13.5% since its IPO at the beginning of February. As such it has underperformed the Korean market, which has risen roughly 30% since then.

"A number of investors viewed this as a catch-up trade," adds the specialist.

Kumho Tire's main benchmark is fellow Korean tire manufacturer Hankook Tire, which is currently trading at about 9.5 times 2005 earnings and has risen 12% since Kumho priced.

In both cases analysts have buy recommendations on the stock. Historically, Hankook has averaged a P/E ratio of 11.6 times earnings and in recent years has peaked around the 14 times level.

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