The offering is unusual in the sense that 100% of the shares are secondary, so none of the proceeds will go to the company. Also, the primary reason for the IPO is not to ready the company for expansion, but to unwind some of the cross shareholdings within the SK group which, according to new regulations, has to be done by the middle of next year. In this particular deal SK Telecom and SK Networks are selling their combined 45% stake in SK C&C, which is the company through which Tae-won Chey, who is the chairman of both SK C&C and SK Holdings, effectively controls the group. Chey will hold 55% of SK C&C after the listing.
SK Holdings was formed last July when SK Corp was split up into one holding company and one operational unit under the name of SK Energy. SK Holdings also owns controlling stakes in several other group companies, including SK Telecom, SK Networks, SK Shipping, K-Power and SK Gas.
The IPO is open to foreign investors, but sources say it is primarily a domestic deal and they expect no more than 10%-20% of the stock will end up overseas. One indication of this is that Woori Investment & Securities is the sole lead manager and bookrunner, while Merrill Lynch is acting only as an international tranche coordinator.
ôIn the current tough markets, one bright spot in terms of liquidity is Korea so the expectation is that the majority of the deal will go to domestic Korea,ö says a banker.
The offer comprises 9 million shares, of which 20% will go to retail investors, 20% to the employee stock ownership association and the remaining 60% to domestic and international investors. Of the total, SK Telecom is selling 6 million shares and SK Networks is selling 3 million. The price range has been set at W115,000 to W132,000 and the final price is expected to be fixed around July 1. According to an indicative timetable, the shares will start trading on the Korea Exchange on July 16.
SK C&C does have its own business, which it is planning to expand, but at this point more than 75% of the companyÆs value is derived from its stake in SK Holdings. Some say this means that while technically an IPO, this deal is effectively a follow-on offering of SK Holdings. This relationship is also likely to be one of the key attractions of the IPO since investors will be able to gain exposure to a number of SK group companies at below market price. According to one source, the price range values SK C&C at a discount of about 25% to SK Holdings, which is already trading at a holding company discount of 25%-40% versus the value of its various units.
ôYes, the company comes with holding company issues, but investors will be significantly compensated for that by getting a double discount. They also get to own shares at the same level as the chairman, which is something a lot of people like to do,ö the source says.
In addition to that, there are no listed Korean companies in the IT services sector, so there is also some scarcity value with regard to SK C&CÆs own business, which is divided into three core areas: outsourcing services, systems integration services and consulting services. Historically more than half of its business has come from other companies within the SK Group, which is the third largest business group in Korea in terms of assets, and in 2007, services provided to other group companies accounted for 57.8% of its total revenues. SK Telecom is its largest customer and, alone, contributed 35% to the top line.
The plan is to expand the non-captive portion of the business both in Korea and overseas, but at the same time continue to provide services to the SK group as this is a less competitive business with higher margins than some of its dealings with third parties. The latter has a lot of potential, however, as the consultancy arm is able to leverage the expertise the company has built up domestically within the telecom, public and financial sectors in particular. It has already established a presence in Mongolia, China and India where the potential for future business should be a lot greater than in Korea where the level of IT penetration is already quite high.
One source notes that the company has been quite successful in expanding into government-linked contracts in the Middle East and Central Asia and has a joint venture with Citi to develop mobile banking services in the US û something which it has already done for SK Telecom in Korea. If that works out, there could be a lot of potential to leverage that business to other US customers as well.
Last year it posted a W196 billion ($189 million) net profit on revenues of W1.16 trillion. In the first quarter this year, the net profit stood at W37 billion and revenues amounted to W226 billion.
A key issue for potential investors to overcome, however, will be the sharp drop in SK HoldingsÆ share price over the past seven months, which may offset the attraction of an IPO discount û no matter how wide. As of yesterdayÆs close at W137,500 a share, the stock was down 52% from a high of W285,000 in early November and was only 2.6% above its lows from March. This compares with a 15% drop in the Kospi index in the same period.