Korea's SK C&C upsizes IPO to $462 million

SK C&C drew strong enough demand for its initial public offering to upsize the deal slightly and still price at the mid-point of the indicated range, according to sources. At a final deal size of W540 billion ($462 million), this is the second largest Korean IPO to date and the upsize is a welcome change after a poor response to several other Korean listings in the past couple of months.

Two weeks ago, Posco Engineering and Construction called off its $770 million to $920 million IPO, citing valuation issues. A source said the issuer had not been willing to accept a price below the initial range, which is where the deal came together. Meanwhile, South Korea's largest producer of soju, Jinro, having already postponed its IPO and lowered the price range once in mid-September, was forced to price significantly below the new range when it returned to the market last month, due to a further deterioration in market sentiment since the new range was set. At the reduced size of $506 million (down from up to $708 million implied by the initial price range), Jinro is still the largest Korean IPO to date, however.

The only other Korean deal with an international tranche so far this year is Tong Yang Life Insurance, which priced its IPO at the bottom of the indicative price range for a total deal size of $286 million. Having attracted reasonable demand for the IPO, the company has however struggled in the secondary market and is currently trading 16.5% below issue price.

There was no information on the final size of SK C&C's institutional order book, but according to sources, both the domestic and the international tranche were multiple times covered. The company is set to file the pricing decision with the Korean regulators this morning, at which point the price and final deal size will become official.

The sources say the number of shares on sale were increased to 18 million from 15 million, which means the public float will be 36% instead of 30%. The price was fixed at W30,000 per share, which was equal to the middle of the W28,000 to W30,000 price range. The 60% institutional tranche was split 50-50 between domestic and international investors.

All the shares were secondary and sold by two other companies within the SK group - SK Telecom and SK Networks, which held a combined 45% stake in the company before the IPO. The pair are selling the shares to unwind some of the cross shareholdings within the SK group which has to be done under new Korean regulations.

Aside from its IT operations, SK C&C also holds 28% of SK Holdings, which was formed in July 2007 when SK Corp was split up into one holding company and one operational unit under the name of SK Energy. This means that SK C&C is the company through which Tae-won Chey, who is the chairman of both SK C&C and SK Holdings, effectively controls the group. SK Holdings owns controlling stakes in several other group companies, including SK Telecom, SK Networks, SK Shipping, K-Power and SK Gas. Chey will hold 55% of SK C&C after the listing.

SK C&C tried to list already in June last year but ended up cancelling the deal due to the depressed stock market conditions. To ensure success this time, the sellers decided not to put their entire 45% stake up for sale, but to keep the deal size at a more manageable 30%, which was then increased to 36% when the level of demand became clear.

Two-thirds of the shares came from mobile phone operator SK Telecom, while the remaining third was sold by SK Networks, a trading firm.

Investors were also said to be more receptive to the deal this time around because the company has won some quite significant order for its IT operation since the previous listing attempt, which has helped to balance the captive business from within the SK group. As a result, investors were said to be willing to give the company more credit for its non-captive business. Last year, more than 75% of the company's value was derived from its stake in SK Holdings.

Since most of the interest for this deal was expected to come from investors who were already familiar with the SK Group and who might value the opportunity to get exposure to the underlying group companies at a discount, the four-day roadshow targeted Asia only, with two days in Hong Kong and two days in Singapore. One source said there were some orders from outside the region, but the majority of the demand came from Asia-based accounts.

The same source noted that the IPO price of W30,000 per share values SK C&C's stake in SK Holdings at a discount of about 50% versus its current market price, while the company's IT business was given an enterprise value of 5-7 times Ebitda.

The stock is due to start trading on the Korean stock exchange on November 11.

Woori Investment & Securities, Korea Investment & Securities and Daishin Securities were the lead managers and bookrunners, while Bank of America Merrill Lynch acted as the international tranche coordinator.