Mixed reception for Korean blocks

An undisclosed shareholder raises $352 million from the sale of its entire stake in Kumho Petrochemical a day after Kepco is forced to cut the size of its sell-down in Kepco E&C to just $87 million.

An undisclosed seller last night raised W409.64 billion ($352 million) from a placement of shares in Kumho Petrochemical, a Korean producer of synthetic rubbers, resins and specialty chemicals, taking advantage of the modest rebound in Asian stock markets during the past couple of sessions.

The clean-up trade was well received with good demand from both international and domestic investors, but in an acknowledgement of the challenging market environment and in order not to cut off the more price sensitive orders, the price was fixed at the bottom of the range for a 7% discount to yesterday’s closing price.

The response contrasted sharply with a block in Korea’s Kepco Engineering and Construction (Kepco E&C) that was in the market the previous day. That deal had to be downsized by close to 40% due to a lack of interest and, according to a source, more than 90% of the total demand came from domestic accounts.

A key difference between the two trades was that the Kepco E&C shares were offered at a much more aggressive price — the final discount was just 3.9% even though the price was fixed at the bottom of the range — but the fact that it was one of a series of sell-downs expected from parent company Korea Electric Power Corp (Kepco) over the next 12 months may also have played a role. Kumho Petrochemical is also a well-liked stock, while many investors are believed to be cautious about Kepco E&C because of its involvement in the design and construction of nuclear power plants.

The Kumho Petrochemical block comprised 2.66 million shares, which represented the entire 10.45% stake held by the seller and about nine days’ worth of trading. They were offered at a price between W154,000 and W157,000, which translated into a discount of 5.1% to 7% versus yesterday’s close of W165,500.

The deal was very well subscribed with the demand spread across all investor types, including global funds and hedge funds, sources said. About half of the total order amount was said to have come from international accounts.

One source noted that the price could have been fixed above the bottom of the range, but as noted, there was price sensitivity in the order book and in the end the decision was made to price at the bottom for the maximum discount. The stock had risen 2.1% earlier in the day.

Kumho Petrochemical’s share price held up relatively well amid the global stock market sell-off in August and September and by mid-October it was almost back at the levels where it traded in early August. Since then the stock has lost almost 25%, but even so it is still up 83% year-to-date.

As a result, it is a stock that a lot of investors look at. The source said there had been some speculation that a block was coming and some investors may have been positioning themselves for that in recent weeks. The fact that this was a clean-up trade may also have contributed to the interest as it means there will be no residual position acting as an overhang on the share price.

The identity of the seller wasn’t disclosed, but it is believed to have been a corporate investor and potentially a related party, rather than a financial institution. Since the deal accounted for 10.45% of the share capital, the seller will have to disclose the transaction in a few days, however.

The Kumho Petrochemical block was jointly arranged by Daewoo Securities and Nomura.

The Kepco E&C block was also anticipated since the parent company, which held 77.9% of the stock before this deal, has to divest a 20% stake by the end of 2012 for regulatory reasons.

Judging by the term sheet, Kepco was hoping to kick off that divestment by selling a 10% stake on Monday, but in the end it had to settle for a much more modest 3.1%.

Kepco initially offered 1.911 million Kepco E&C shares, representing a 5% stake, but said it may upsize the transaction by another 1.911 million shares in case of demand. The shares were marketed at a price between W86,100 and W89,600 apiece, which represented a discount of zero to 3.9% versus Monday’s closing price of W89,600.

That did look a bit steep, especially in light of the continuing volatility in global equity markets. Kepco E&C’s share price had also almost doubled from its lows of W45,850 in early October.

According to a source, the seller was quite specific on the price and discount it wanted to achieve and was less concerned about the overall size of the deal, but as it were the four joint bookrunners agreed to launch the deal only on a best efforts basis to give themselves more flexibility.

In the end they managed to do a deal at the bottom of the price range, but the modest demand meant the size had to be cut to about 1.176 million shares, or about 61.5% of the targeted base deal. At that size the deal accounted for about seven days’ worth of trading volume and will reduce Kepco’s stake to 74.8%. Its remaining shares will be locked up for 90 days.

As noted more than 90% of the demand came from domestic investors, which on the one hand can be seen as a positive sign as Korean institutions have been a bit hesitant to participate in block trades in the past couple of months. On the other hand, it also suggests that international investors do need more attractive discounts in the current market environment.

That said, Kepco E&C is owned mostly by domestic investors to begin with.

The final order book was said to have included just over 30 investors.

Kepco E&C’s share price fell 5.1% yesterday in the wake of the deal to finish at W85,000 — 1.3% below the placement price.

Morgan Stanley, Samsung Securities, Tong Yang and Woori Investment & Securities were joint bookrunners.

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