LGP blazes new record for Asian tech

LG Philips LCD completes the largest ever tech deal from non-Japan Asia.

Korean TFT-LCD producer LG Philips LCD has executed its most successful international capital markets transaction to date, raising $2 billion via a concurrent ADR and common share offering yesterday (July 21). The deal represents Asia's largest equity deal so far this year, Korea's largest equity deal to date and Asia's largest tech deal to date.

Thanks to a $6 billion order book packed with over 200 investors, the deal could also be priced relatively aggressively by its four lead managers: Morgan Stanley and UBS (joint global co-ordinators), plus ABN AMRO Rothschild and Citigroup (joint bookrunners). A total of 70 million ADS units were priced at $21.32 per unit and 11.7 million common shares at Won44,500 each.

The common shares were priced at a 0.67% discount to the stock's Won44,800 close in Korea on Thursday and the ADR's at parity to their close in New York the previous night. On the last day of the bookbuild, the stock traded flat.

The deal is likely to be judged a huge success, the more so because it has followed a spate of capital raisings by Taiwan's TFT-LCD producers. For once LG Philips appears to have got its timing right, benefiting from buoyant equity markets in the run up to the summer break. Sentiment towards the flat panel sector also appears to be increasing with each successive deal and LGP's latest offering follows an equally successful deal for AU Optronics earlier this week.

LGP's new deal may also go some way to expunge the memory of the its IPO this time one year ago, which came at a time when the sector was in freefall. As a result, the secondary market tranche of the IPO had to be scaled back and has re-surfaced now following the expiry of a one-year lock-up.

The deal has been structured such that $1.2 billion was raised in primary shares and $800 million in secondary shares. There is also a $200 million greenshoe of primary shares in ADR format.

As a result of the deal, the group's two major shareholders - LG Electronics and Koninklijke (Royal) Philips - will see their combined stake reduced from 89.2% to 77%. LGE sold $400 million through the domestic market, while Philips sold $300 million in ADR format and $100 million in domestic shares. The primary shares were all in ADR format.

The freefloat will now expand from 10.8% to roughly 23% and existing investors will suffer 8.6% dilution. The company will also now be subject to a six-month lock-up and the two shareholders to a three-month lock-up.

Over the next three years, LGE and Philips have said they hope to bring their combined stake down to 40%.

At Won44,800, LGP is trading at roughly 2.5 times 2005 book. Year-to-date the stock is up 14.87%, but has come down from a high of Won54,000 in early June when it was valued around the 2.9 times level.

Since then it has traded in a consistent downward trend with the exception of a slight uptick in mid-June. But this pull-back undoubtedly helped momentum for the new deal, since it bought the group's valuation back in line with the cycle.

Its nearest direct comparable, AU Optronics is currently trading around 1.8 times 2005 book.

Earlier this week, the group released its second quarter results, which were slightly better than analysts had been expecting. The company was able to swing back to a slight profit of Won41 billion compared to a net loss of Won79 billion at the end of the first quarter. Its EBITDA margin increased from 13.5% to 19.6%.

Analysts now conclude the cycle hit its trough during the first quarter and has begun to re-bound. The key question now, of course, is how much of this has already been priced into the market and how long the upswing will last.

There are a number of differing opinions.

Some of the most bearish houses believe the re-bound will be short lived, with the sector swinging back to a net loss during the first half of 2006. This argument is based on lack of industry consolidation and aggressive capacity expansion, which means companies will continue to sustain capex to sales ratios above 50%.

The most bullish houses, by contrast, believe 2006 results will be strong as the long fabled inflexion point for flat screen TV kicks in. During 2004, only 4% of global sales were flat screen TV's compared to 91% for CRT's and 2% plasma.

However, there are some wide geographical variations. In Japan, for example, flat screen TV's accounted for 28% and the US 15%.

TV panels now account for 24% of LGP's product mix compared to 22% during the first quarter and 13% this time one year ago. Giving guidance for the third quarter, the company said shipments should see growth in the mid-teens and ASP's in the single digits.

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