New jumbo Korean IPO launches roadshows

Macquarie Korea Infrastructure Fund hopes to follow in the footsteps of Lotte Shopping with Korea's second $1 billion plus IPO of the year.
Macquarie Korea Infrastructure Fund kicked off roadshows for its IPO yesterday (February 22) after setting a price range that will net proceeds of $960 million to $1.16 billion.

Four existing investors have decided to sell up to 63.16 million existing shares, which will result in a split of 54% primary shares and 46% secondary shares. The largest vendor is the Government Employees Pension Fund, which currently owns 22.2% of the fund.

The other sellers are The Korea TeachersÆ Pension, which holds 9.6%, Kyobo Life Insurance, which has 7.2%, and Dongbu Life Insurance, which has a 3.2% stake. None of the four are selling their entire stake.

Macquarie Securities and Merrill Lynch are joint arrangers of the deal, with Good Morning Shinhan Securities and Samsung Securities running the domestic offering. Post greenshoe, total proceeds could rise to $1.34 billion.

The deal will also have a split of 71% GDRÆs and 29% common shares. The domestic price range has been set at Won6,800 to Won8,250 per share, which corresponds to a GDR range of $7.02 to $8.52. One GDR equals one common share.

At the bottom of the price range, the fund will be valued at discount of about 14% to 21% to its net present value based on syndicate research. This compares with an average discount of 10% to 15% for other listed infrastructure funds.

In terms of yield, the IPO will offer 4.8% to 5.9% based on a 100% pay-out ratio. The fund has guaranteed that the 2006 yield will be at least Won400 per share.

However, since the fund is only listing in March, the annualized yield will be slightly higher than the nine months yield. One observer calculates that this will equate to 6.3% based on a price of Won8,000 per share.

Fund managers say this looks attractive compared with an average 2.2% yield in the Korean market. It also compares favourably with other international funds, which on average pay just over 4%.

ôThese kinds of funds are very hot among long-term funds around the region at the moment, so the offer should be popular,ö says one asset manager. He cites diversification as a key reason to buy the new vehicle since it will be the first toll road or infrastructure play to list in the Korean market.

At the same time, the dealÆs novelty value makes it harder to value and some observers believe investors may hesitate to buy in, or limit their orders towards the bottom of the range.

One banker familiar with the offering also plays down the fact that a large portion of the shares will come from existing shareholders. Some might interpret this as a lack of confidence in the longer-term prospects of a fund, which was only established in January 2003.

ôThe main reason most of them are selling is to rebalance their portfolios,ö he comments. ôThe Government Employees Pension Fund, for example, has a pretty significant exposure to this particular stock as an investment.ö

The new and existing shares combined will account for about 40% of the total share capital pre-greenshoe. Existing shareholders who are not selling in the IPO will be subject to a lock-up of at least six months. As a result, this will essentially also make up the free-float at the time of listing.

The Shinhan Group, which currently holds a combined 15% of the fund, and Macquarie International Holdings, which has a 5.1% stake, have agreed to a longer lock-up of 12 months. They have done so because of their role as the manager of the fund through their 50-50 joint venture Macquarie Shinhan Infrastructure Asset Management Co.

MKIF has invested (or made commitments to invest) more than Won1.9 trillion ($1.94 billion) in 14 assets, consisting of 13 toll roads or tunnels and one railway. These assets are expected to generate a steady and gradually increasing income stream. Observers believe this will be complemented by the fundÆs growth potential as projects currently under construction become operational and the fund continues to invest in new infrastructure projects.

Over time, the fund is also expected to benefit from the refinancing of debt held by the various project concession companies, as well as the potential to increase the leverage of the fund.

ôThe average gearing for the fund at the moment is about 40% (primarily held by the concession companies), while typical toll road asset gearing is about 70%,ö one observer concludes. ôSo there is quite an opportunity to add more debt and to either return cash to shareholders and boost the dividend yield, or to increase investments into new projects.ö

The book-building will close on March 6 and the price is expected to be fixed on the following day. The shares are scheduled to start trading in London on March 14 and in Seoul the following day.


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