Korean steel manufacturer Posco surprised the market on Tuesday evening by launching simultaneous block trades in three different Korean companies: Hana Financial Group, KB Financial Group and SK Telecom. The deals were all offered at pretty tight discounts, but thanks to the fact that many international investors were underweight Korean stocks – and that that these companies are all well-known names – they were all well covered, allowing Posco to raise a combined $514 million.
Each of the transactions also accounted for just a few days of trading volume, which meant they were quite easily absorbed by the market. An indication of this was that two of the three companies closed above the placement price yesterday, while the third one – Hana Financial – finished only marginally below.
It is unusual for one vendor to sell shares in several companies at the same time, especially when the companies are not in the same sector and therefore appeal to somewhat different investor groups. But it does happen. One recent example is Temasek’s sale of shares in Bank of China and China Construction Bank through two simultaneous accelerated bookbuilds in July last year, which raised a combined $3.6 billion.
Sources say the practice is not uncommon in Korea, although most such sales tend to be small and go largely unnoticed outside the domestic market.
And for Posco it was an obvious solution. The company needed to raise money, but since it already has a lot of outstanding debt, it didn’t want to tap the bond market and a fresh equity issue would mean dilution for existing shareholders, the need for approvals etcetera. Monetising its shareholdings in other companies would be a lot easier and would have no implications for its own shareholders. However, Posco’s stakes in each of these three counters were quite small, and because it has strategic relationships with the companies, it didn’t want to exit its positions completely – and risk upsetting anyone.
Also, if it had sold shares in just one company, it could easily have created an overhang issue and prompted the other companies in its investment portfolio to underperform due to speculation that more placements might follow. Especially since the market knows that Posco needs to raise money. Better to sell a smaller portion in several companies in one go, one observer said.
And sources said there was a certain amount of overlap in terms of demand, with some investors – international hedge funds, global and regional asset managers, and traditional domestic funds in particular – buying shares in all three companies.
The largest of the three blocks was the one in SK Telecom, which raised W315.33 billion ($280 million). Posco offered approximately 2.3 million shares, which corresponded to about 2.8% of the outstanding share capital and will reduce its holdings in SK Telecom to a little more than 2%. The shares were offered at a price between W135,400 and W139,700, which translated into a discount of 2% to 5% versus Tuesday’s close of W142,500.
The deal priced at W137,100 per share for a discount of 3.8%.
According to a source, investors were excited about the rare opportunity to buy SK Telecom shares at a discount and about 70% of the demand came from international investors, including a large number of existing shareholders. The final order book was multiple times covered and displayed a good mix of long-only investors from Asia, Europe and the US. Allocations were a bit tighter than on the other two blocks, according to another source. In all, about 70 investors participated in the transaction.
SK Telecom’s share price has been mostly range trading in the first quarter, but analysts are positive on the stock. According to Bloomberg their recommendations include 24 “buys”, seven “holds” and no “sells”. The share price fell 3.2% yesterday to W138,000 – slightly above the placement price of W137.100.
The second largest trade was in KB Financial, the operator of Kookmin Bank. The deal raised W164.97 billion ($147 million) and was the tightest priced of the three blocks, as it came at a zero percent discount to the latest close.
Posco sold approximately 3.9 million shares, or about 1% of the outstanding share capital, reducing its stake in the company to about 3%. Most of its remaining shares are tied up in a $320 million yen-denominated exchangeable bond that Posco issued last year and which is exchangeable into SK Telecom ADRs (American depositary receipts). The shares were offered at a price between W41,500 and W42,300, with the latter being equal to Tuesday’s closing price. The bottom of the range translated into a discount of 1.9%.
The deal was supported by one investor in particular (described as a Korean long-only fund) that came in with a very large order and triggered a few other accounts to follow in relatively large sizes. This allowed the price to be fixed at the top of the range at W42,500 for a zero percent discount.
Aside from the top investor, and despite the fact that it didn’t offer any discount, one source said this deal attracted more demand from hedge-fund than from long-only accounts. About 50 investors participated in the transaction, which was said to have been a couple of times covered.
KB Financial’s share price gained 1.7% yesterday to W43,000, making it one of the rare blocks this year that has made money for investors straight off the bat.
The smallest of the three transactions was Hana Financial, which made sense since Posco only owed about 2% in this company to begin with. At the final price, this transaction amounted to W97.79 billion ($87 million)
.Posco sold approximately 2.2 million shares, or about 0.9% of the outstanding share capital. The shares were offered at a price between W44,050 and W44,900, which equalled a discount of 0% to 1.9% versus Tuesday’s closing price. The price was fixed at W44,450 for a 1% discount.
Like the KB Financial trade, this deal was covered pretty quickly and when the order books closed for the three transactions shortly before the US markets opened on Tuesday evening, the subscription ratio had reached about two times. The majority of the demand came from international investors and there was a fairly even split between hedge funds and long-only accounts, sources said. About 40 investors came into the trade.
Unlike SK Telecom and KB Financial, Hana’s share price has opened 2012 on a strong note, supported by the regulatory approval in late January to buy Lone Star’s 51.02% stake in Korea Exchange Bank for W3.9 trillion ($3.48 billion). Hana is also buying a 6.25% stake in KEB held by Export-Import Bank of Korea. The stock is currently up about 26% this year, well above the 10.6% gain in Korea’s benchmark Kospi index.
Yesterday the share price fell 1.6% to W44,200, making Hana the only one among the three blocks to close below the placement price. However, a loss of W250 is hardly a disaster, particularly since the placement was done off a 10-month high.
Bank of America Merrill Lynch, Samsung Securities and UBS were joint bookrunners for all three trades.