SK Corp mandates SK Telecom exchangeable

The Korean oil refiner hopes to raise up to $2 billion in what will mark the largest ever equity-linked offering to emerge from the Republic of Korea.

Having sent out a 24 hour Request For Proposals (RFP) two weeks ago, Credit Suisse First Boston and Goldman Sachs have emerged as the winners of a transaction which will easily surpass the existing record held by KDIC/Kepco's $1.001 billion exchangeable.

The deal is provisionally being targeted for February 2002 and observers believe that Goldman is likely to run the books along with CSFB. The appointment of neither bank is much of surprise, despite the outward appearance of a bidding contest. Goldman, for example, led SK Telecom's New York listing in 1996 and CSFB recently completed a $250 million Eurobond for the parent, which marked the first dollar bond offering by a non government-owned entity since the financial crisis.

Rumours of an exchangeable have been circulating for the past couple of weeks and come at a sensitive time, since the company has not formally announced that it has ended talks with Japan's NTT DoCoMo on the sale of a strategic stake. Goldman was also acting as advisor on this deal, which would have represented 14.5% of the equity held by SK Corp in SK Telecom.

The parent needs to raise funds to pay down debt and having been unable to secure a deal with the Japanese cellular company has decided to monetize its stake through an exchangeable instead. Korean experts say that talks largely foundered because NTT DoCoMo has begun to re-appraise its strategy of buying minority stakes in overseas operators. Having spent Y1.8 trillion ($14.6 billion) in acquisitions over the past two years, the company saw first half net income almost halve after having to write-off losses associated with Dutch cellular operator KPN Mobile.

In the hope of facilitating a straightforward strategic sale, SK Corp has been holding a 14.5 % stake in its cellular operator through an offshore SPV known as Signum IX. Should a strategic stake fall through, these shares will return to SK Corp and SK Global at the end of the year.

At the moment, it is not clear whether the group intends to sell the whole 14.5% through an exchangeable. Were it to do so based on yesterday's closing share price of Won258,000 and 12.927 million shares, it would raise W3.33 trillion (2.64 billion). However, observers believe it is hoping to structure a deal, which will result in the sale of 6.4 million shares held by Signum IX and a further 3.2 million shares held by SK Global. The sale of these 9.6 million shares would raise a slightly less ambitious Won2.476 trillion ($1.956 billion) and represent 10.76% of the company's equity.

SK Corp, Korea's largest oil refiner, has said that it wants to sell equity in SK Telecom to reduce debt levels. At the end of 2000, the company reported W6.4 trillion in outstanding debt, of which W3.3 trillion consisted of short-term debt. Moody's has also commented that it is unlikely raise SK Corp's Baa3 rating unless it can improve its interest coverage ratios and reduce financial leverage of 4.4 times EBITDA.

Based on end September figures, SK Corp owns 34.11% of SK Telecom, the country's second largest company by market capitalization, and will see its ownership drop to about 23.35% should it sell a 10.76% stake as expected. Other major shareholders include Korea Telecom, which holds 13.39% and Posco, which holds 6.5%.

SK Telecom represents 11.26% of the Kospi and year-to-date has been a significant underperformer. While the company currently stands just 1.98% up on the year, the overall index is up 27.593%. Much of this latter gain has occurred since September 11 and has recently been fuelled by rumours that MSCI (Morgan Stanley Capital International) is about to re-classify Korea as a developed market, at which point it would benefit from massive international fund flows.

Uncertainty also surrounds the fate of a 15% strategic sale in Korea Telecom, the country's third largest company by market capitalization. It was recently reported that in the absence of a strategic partner for the group, the government intended to sell a 10% stake worth $950 million. This was to take the form of a private placement convertible to the company's strategic advisor Merrill Lynch and investment fund Emerging Market Partnership.

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