Lotte Shopping has raised W3.43 billion, or $3.54 billion, after strong demand from foreign investors allowed the Korean retailer to price Asia's largest non-privatization IPO. The deal priced two thirds up the price range at W400,000 per share.
The deal, which was also the largest ever equity fund raising out of Korea after LG Philips LCD's $2.2 billion secondary offering in July last year, is sparking hopes that more Korean companies will look to the equity market for funds this year.
Goldman Sachs and Nomura were joint lead managers for the international portion of the offer, which comprised 80% of the 8.57 billion shares that were initially offered in a range of W340,000 to W430,000. The domestic offer will be arranged by Daewoo Securities and will run from February 1 to 3. The shares will have a dual listing and will debut in London on February 8 and in Seoul the following day.
With a 30% free float the company will have a market cap of $11.8 billion at the time of listing, which will rank on par with KT Corp and LG Electronics. If the 12% greenshoe is exercised in full, total proceeds could increase by a further $424 million.
The international book, excluding the about 20% earmarked for Japanese investors through a Public Offering Without Listing, was said to be more than 10 times covered at the final price with orders from approximately 500 investors. Price sensitivity was believed to have been minimal at that level and demand was fairly evenly balanced between Asia, Europe and the US.
The price, which translates into $20.67 per GDR (each share being equal to 20 GDRs), values the company at about 15 times 2006 earnings based on average syndicate projections, which at the time of pricing worked out to be a discount of about 10% to its main competitor, Shinsegae's 16.7 times on Thursday.
Both Shinsegae, which has a market cap of $9.65 billion, and smaller-cap Hyundai Department Stores had a strong run in the secondary market on Friday, however, where they added 6.2% and 5.8% respectively to finish at record highs. This meant Lotte investors were immediately given a bit more room on the upside.
The two stocks were also well bid throughout last week, partly due to comforting sales data, partly as a result of Lotte's IPO roadshow attracting attention to the sector, with Shinsegae gaining 14.5% and Hyundai up 14.6%.
Investors who were already focusing on Lotte as a play on South Korea's economic growth prospects amid a recovery in consumer spending were given further evidence of this halfway through the marketing period when the commerce ministry released data showing that combined department store sales at Lotte, Hyundai and Shinsegae grew at a record 19% in December from a year earlier.
The government is also forecasting economic growth to accelerate to 5% this year from an estimated 4% in 2005.
The data, however, only confirmed the management's view of the growth potential in the Korean retail sector that it had already been communicating during the roadshow.
"Investors like the stability associated with the company being the country's leading department store operator, which acts as an anchor for its business, while at the same time they see more growth opportunity in the discount store sector than for its bigger rival," one observer said.
Lotto is currently the second largest discount store operator with 40 outlets, compared with E-mart's 75 (which it is looking to boost to 100 by the end of 2007), and has said it will primarily focus on expanding this business. Discount stores are considered to be a high-growth segment of the retail market, although it has lower profit margins than the department store sector where barriers to entry are higher. Lotto also plans to utilise its existing land bank to open five more department stores in the next two years, including one in Moscow.
The company's 22 existing department stores currently generate about 60% of revenues, while the discount stores account for 30%. The remainder is split between its 45 supermarkets and a range of other businesses like Lotte Cinema and Lotte Credit Card as well as several franchises, including Java Coffee and Krispy Kreme donuts.
"Lotte has very diverse interests as a retailer and represents a good opportunity to tap into the ongoing swing from an old retail environment with a lot of mom and pop shops to a new retail environment with modern stores," said one observer.
While somewhat company specific, the demand can also be seen to highlight the continued strong interest and confidence in the Korean market from international investors, who will be hoping for a repeat of 2005 when the Kospi outdid all other benchmarks in the region with a 54% rally. Investors may have also jumped at the rare opportunity to invest at the IPO stage in a Korean company that will slide right into the country's top 12 listed companies in terms of market cap.
However, the department store operators already trade at premium valuations to the broader market and Lotte will need to prove itself in order to live up to the high multiple target set by Shinsegae, which is more familiar to the broader investor base.