The two investment banks beat ABN AMRO, JPMorgan and Salomon Smith Barney for an offering, which is not now expected before the fourth quarter this year. The decision has come as something as a surprise to most market watchers, since JPMorgan and Salomon had been hot favourites because of their role as M&A advisors in the creation of the TFT-LCD joint venture, with JPM advising Koninklijke (Royal) Philips Electronics NV and Salomon LG Electronics.
However, it appears that one of the main considerations for LG Philips LCD was certainty of funding and to this extent, promises to extend one-year bridge financing are said to have been key. Again, however, a number of ECM bankers who did not participate in the bidding, note that neither Morgan Stanley or UBSW are known for their willingness to commit this kind of capital, whereas both JPM and Salomon are.
It is also virtually unheard of for investment banks to bridge funds in the hope of being taken out by an IPO and some have described the current situation as yet another example of the competitive lengths many houses are prepared to go in order to secure key mandates.
Yet few would doubt that LG Philips LCD ranks among a premier elite of Asian blue chip names and if they can pull it off, the mandate will be a huge coup for both banks. LG Philips LCD is also a company with heavy capital requirements and likely to be a frequent capital markets issuer. In future, it may well decide to stick with those banks it perceives have shown it loyalty in difficult market conditions.
And markets conditions are certainly difficult both from the perspective of a domestic equity market buffeted by nuclear missiles and accounting frauds, as well as an industry beset by volatile price swings and rapid technological advances. A gamble on providing bridge financing in these circumstances might, therefore, be viewed as brave or foolhardy or both
The terms of a bridge, if one materialises, are not yet known. However, observers within the TFT-LCD industry say the issue size will be for $500 million, with an equal split between the two leads. The deal will have a one-year maturity and no guarantee from either of the joint-venture's parent companies.
It seems almost certain the two will want to offload the risk through the syndicated loan market. But, syndicated loan players believe this will be difficult at least for the short-term. There are currently few South Korean deals in the market and those that are tend to be small in size and underwritten by each issuer's close relationship banks on a club basis.
LG Philips LCD, for example, had recently hoped to raise $550 million to re-finance an FRN with a three-year call. Completed in April 2001 under the auspices of ABN AMRO and Citigroup, the deal had a headline margin of 110bp over Libor and an all-in of 136.67bp. But bankers say the company dropped the plan after it was unable to secure competitive funding and will now rely on a bridge.
Getting a bridge in place will also lessen the urgency to complete an equity offering and this in turn is further complicated by plans to become the first Korean company to secure a simultaneous domestic IPO and New York Stock Exchange listing. With LG Securities also mandated as domestic lead, LG Philips LCD had initially hoped to complete the all new equity deal by July or September at the latest. This is now viewed as completely unrealistic and some believe the deal may not happen until the first quarter of 2004.
Analysts say LG Philips LCD’s desire for funding follows its accelerated 5G ramp up ahead of the competition in Taiwan and its ambitions to stay at the head of the pack by making the jump to 6G. In a recent research report, UBS Warburg said that both LG Philips LCD and Samsung Electronics are overcoming yield problems with their 5G plants and will aggressively increase capacity throughout the rest of the first half.
"They will shift production into large, premium panels for desktops and LCD televisions as well as small, value TFT-LCDs for handsets and PDAs," it wrote.
And it added, "We find that both are pursuing an early foothold in the large TFT-LCD TV screen market, where ASP (Average Selling Price) per inch is significantly higher than for mainstream 15-inch monitor panels."
According to industry consultant DisplaySearch, the LCD TV market is expected to grow from 1.3 million units in 2002 to more than 16.1 million units by 2006.
Throughout 2003, analysts conclude that prices are likely to remain under pressure as the intensely competitive sector ramps up production. However, most believe the scale and high end product mixes of both LG and Samsung will shield both from potential price volatility.
Also looking at a fourth quarter equity offering is Daewoo Shipbuilding and Marine Engineering (DSME), which sent out an RFP on April 2 for a 15% divestment. At a current stock price of roughly Won10,650, this would equate to a $245 million offering.
The RFP is said to be due back in this Friday, with JPMorgan already secure in one of the two bookrunner's slots on offer - it was previously mandated for a smaller government divestment last summer.
The government is now hoping to sell down a combination of existing shares held by the Korea Development Bank (KDB) and Kamco. Currently, about 31% of DSME's 192.39 million shares are in freefloat, with KDB holding roughly 41% and Kamco 26%.
The two acquired their stakes for Won7,845 in the autumn of 2000 via a debt for equity swap, with the company formally exiting its debt rescheduling in the summer of 2001.
Since then the government has made unsuccessful attempts to find a strategic buyer and analysts have always maintained that the prospective privatization has been a continual weight on the share price. It has, however, performed extremely well this year and is currently up about 52% on the year.
The company is also now viewed as one of the best in the Republic, with a clean balance sheet and reputation for good corporate governance.
