A consortium headed by Samsung Corp has sold its controlling stake in the Incheon Expressway, in a deal valued at W371 billion ($314 million). The move allows Korea's top chaebol to unlock capital from the investment. It completed the construction of the 40km airport road in 2001 as part of the government's policy to bring private finance into the Korean roadbuilding programme.
The stake has been sold to a consortium led by the Korean Teachers Credit Union, which previously held 9% of the road. The consortium is buying 81.5% from Samsung Corp, and the Korean Teachers will hold 44% of that.
It is thought the second biggest member of the acquiring consortium is the Korean Road Infrastructure Fund, which is run by Macquarie and Shinhan, although that was not confirmed. The Korean Road Infrastructure Fund was established at the end of 2002, but has already developed a reputation for the acquisition of and management of toll roads.
The road, which contains two tunnels as well as various bridges, has an asset value (including debt) of $1.2 billion. For the acquirer, it is thought the road will offer a stable return on capital of around 15% through the life of the concession (which was set at 30 years). That is a considerable pick-up on government bonds, which yield around 10% less.
The beauty of the acquisition is that the road is underwritten by a government guarantee for the life of the concession. This guarantee is structured around pre-construction estimates of traffic usage, with the government guaranteeing to make sure the operator is paid for 80% of the estimated amount that traffic should pay in tolls. Thus far the government has had to top-up the amount to the shareholders every year.
The road has not seen as much traffic as was originally planned, in part due to SARS causing drops in arrivals to Korea and also because a number of residential and industrial projects along the road have not been completed as soon as expected. The peak usage was in July 2002 when 70,000 vehicles per day used the road. That number stands at 55,000 today.
The valuation is therefore based around the guaranteed revenue the government must pay. It is not known what this exact number is. But what this means in practice is that the government is offering a top-up to the operator which in turn means the operator can project their revenues with absolute certainty no matter how much usage of the road falls. On the other hand, if the traffic exceeds the government's original planned usage target then this represents upside for the operators above and beyond the guarantee.
A quick calculation can give a back of the envelope estimate of the numbers concerned. If the return on investment is roughly 15% and the equity value of the road is around $375 million, then the government guarantee is worth around $55 million per year. So if the tolls were only $45 million, the government is obliged to pay $10 million to the operator of the concession to make up the shortfall.
The government created this guarantee system to encourage the building of new roads, of which Korea is in dire need for a country at its stage of economic development. Most independent consultants view the programme as a success; especially since the government avoids the upfront capex of constructing the roads.
For the chaebols that have built many of these roads, such M&A exits offers them a chance to realize capital to use in other parts of their business. In this case, however, the Samsung chaebol has not entirely exited from the investment. Samsung Life retains an 18.5% stake. ING advised Samsung Corp on the disposal.