One day before a roughly $370 million GDR was originally due to price, the Korean government formally confirmed that it is has delayed the final tranche of its privatization of Korea Tobacco & Ginseng (KT&G). The market had been expecting the news for over a week after the four leads - Goldman Sachs, UBS Warburg, Dongwon and Hyundai Securities - failed to begin roadshows on July 1 as originally scheduled.
There have been varying opinions about the absolute share price level international investors were willing to accept for the 14% divestment, but all agree that the delay makes sense given market volatility.
As one observer comments, "The feedback we got from investors tended to be very mixed and varied from day to day depending on overall market sentiment. But generally, most were pretty lukewarm and were looking both for the generous dividend yield (currently 9%) and a reasonable discount to spot, up to the 5% level."
Others, however, report that it could have been possible to push for parity or a very slim discount provided markets had been slightly better. A second adds, "With a bit of good wind, it would have been possible to price in a very slim discount. A number of accounts were very aware that this represented their last opportunity to get hold of stock in size because of the 5% foreign ownership cap which still exists."
But overhanging it all was the recent domestic share sale and the government's political difficulties selling stock to foreign investors at a discount when local investors had paid a premium. The domestic tranche, which preceded the international deal and represented a 19.4% stake, comprised a share placement and exchangeable bond.
However, after the domestic share price slipped below the government's pre-set price of W16,200 the placement tranche ended up being priced at a 4.5% premium and was undersubscribed. The one mitigating factor for the government would have been the fact that the share price rallied after the domestic deal was completed and ended the day the GDR was formally pulled (Wednesday) at Won16,450, meaning that in absolute terms, foreigners would have paid a higher price.
But, undersubscription for the domestic placement tranche resulted in excess stock being placed into the exchangeable and therefore the overhang, which has historically constrained KT&G's share price, has not really been removed. The $408 million exchangeable was priced with a coupon of 2.5% and conversion premium of 10% to yield 5.7% to the three-year put.