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Posco E&C calls off IPO, while Indiabulls Power prices at the top

The Korean engineering and construction company decides to cancel the deal rather than to price below the initial range.

Posco Engineering and Construction has called off its $770 million to $920 million initial public offering, which was due to price on Monday, making it the third Korean listing candidate in short succession to make headlines for the wrong reasons.

According to a source, the international portion of Posco's offering, which was to have accounted for about 34% of the deal, attracted good demand from a mix of Asian and global funds with some three-quarters of the demand coming from long-only accounts. The orders were quite price sensitive, however, and the book was said to have come together at a price somewhere in the range of W80,000 to W90,000 per share. This compared with an initial price range of W100,000 to W120,000.

However, in Korean IPOs the price range is set before the bookrunners have had any feedback from investors and it is far from uncommon that the final price is fixed below that first range. In the case of Posco, however, the source said the issuer was not willing to accept a price below the initial range and decided to cancel the deal. The company issued a statement in Korean that, according to a translation, said it had agreed to postpone the IPO due to valuation issues. The filing wasn't immediately withdrawn, meaning Posco would have the option to make a second attempt to list before the end of this year, although market participant did not view that as likely.

In mid-September, Jinro, South Korea's largest producer of soju, postponed its IPO just before pricing to make changes to its listing documents and at the same time lowered the price range. When it returned to the market later in the month, it was forced to price well below the new range as market sentiment had deteriorated somewhat, resulting in IPO proceeds of just W590.4 billion ($506 million) -- well below the up to $708 million that the initial price range had implied. However, Jinro has traded up a combined 4.9% since its debut on Monday this week.

Meanwhile, Tong Yang Life Insurance priced its IPO at the bottom of the indicative price range, which some observers argued was aggressive in relation to the investor feedback. Indeed, Tong Yang fell 16.8% in its trading debut on October 8 and while it has rebounded slightly from the lows, it is still trading 11.8% below the IPO price. The company, which was the first of Korea's life insurance companies to go public, was brought to market by Credit Suisse, Daiwa SMBC and Morgan Stanley.

The stumbles in Korea's IPO market are in stark contrast to India, where investors continue to pile into new listing candidates. Yesterday, Indiabulls Power became the fourth listing candidate of size since August to fix the price of its IPO at the top of the IPO range, allowing it to raise Rs15.29 billion ($327 million). The only other IPO in the past three months, Pipavav Shipyard, priced above the mid-point.

It doesn't seem to matter that some of the newcomers have fallen quite significantly in the secondary market or that a few of them, including Indiabulls Power, are still at the greenfield stage, prompting analysts to warn about execution risks. Primary market investors are seemingly happy to look at the longer-term picture, which in the case of Indiabulls Power includes a significant need for additional power generation capacity to cover the electricity shortages that plague the domestic economy.

Indiabulls Power's offering, which was led by Morgan Stanley, ended 21.8 times subscribed, with all orders placed either at the top of the Rs40 to Rs45 range, or at the cut-off price. The 60% tranche targeted at qualified institutional buyers was 40.5 times covered, with 78% of that demand coming from foreign investors. Part of the foreign demand was secured before the launch of the bookbuilding last Monday as the company sold 30% of the QIP tranche to eight anchor investors, most of which were foreign funds focusing on India.

Meanwhile, the 10% tranche aimed at non-institutional investors, such as corporate and high-net-worth individuals, was 5.8 times covered, while the 30% retail portion attracted orders for 1.09 times the amount of stock available.

Indiabulls Power sold 339.8 million new shares, which accounted for 17% of the enlarged share capital. The deal also includes an overallotment option of about 15% of the deal, which could lift the total proceeds to as much as $376 million. The company was established in 2007 and has five thermal power projects under development.

A source said there was really no discussion about where to price the deal -- the top end was virtually a given at that level of demand, especially since the Indian market continues to trade higher. The benchmark Sensex index closed at fresh 12-month highs on Friday and Saturday before easing off 0.6% yesterday. The index is now up 78% this year, making it the third best performer among the major markets in Asia after Shenzhen and Jakarta, which are up 94% and 84% respectively (Vietnam and Sri Lanka have almost doubled but are tiny in terms of market cap and trading volumes).

The source noted that the Indian IPOs are helped by the fact that there aren't three deals a week, as in Hong Kong, but rather the number of offerings is still quite small.

The same can be said for Korea, however, with only three IPOs with an international element so far this year and a fourth one in the market at the moment. That last issuer, IT services provider SK C&C Co, is looking to raise up to $411 million based on the initial price range of W28,000 to W32,000. Woori Investment & Securities, Korea Investment & Securities and Daishin Securities are the lead managers with Bank of America Merrill Lynch acting as coordinator for the international tranche.

SK C&C initially tried to list in June/July last year, but called off the deal before pricing due to the depressed stockmarket conditions at the time. Coming before the sharp market correction following the collapse of Lehman Brothers and the onset of the financial crisis, that SK C&C's first IPO attempt was more than twice the size of the current deal, at up to $1.15 billion.

Looking at Posco E&C, the source said the price sensitivity was fuelled partly by Tong Yang's weak trading debut. The Korean company also started marketing on the day when Metallurgical Corporation of China, a company involved in the same type of business as Posco E&C, fell 11.7% in its Hong Kong debut.

However, according to the source, Posco E&C's initial price range was also seen to have offered a less than sufficient discount to its key domestic comparables. At the bottom of the initial range, Posco was valued at about 12.2 times its 2010 earnings, while the nearest comp, Hyundai Engineering & Construction, closed at a 2010  price-to-earnings ratio of 15.1 times yesterday. GS Engineering & Construction closed at a P/E multiple of 11.9, while Samsung Engineering Company fetched a P/E multiple of 15.6.

Posco E&C offered 8.897 million shares, of which 52.6% were secondary shares to be sold by its parent company, Korean steel manufacturer Posco. Posco E&C generates a significant portion of its revenues from businesses done with the parent, which results in more stable earnings than for many of its peers. The IPO was arranged by Bank of America Merrill Lynch and Daewoo Securities.

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