SK Networks divests SK Telecom stake

Morgan Stanley completes an unusual ADR trade.

SK Networks, formerly SK Global, has sold a 1.3% stake in SK Telecom, Korea's largest listed company, with a market capitalization of $13 billion. However, the deal, which was completed after Korea's close yesterday (Wednesday), will not become fungible with the outstanding ADR float for 40 days.

This is because the Morgan Stanley-led transaction was completed in Reg S format. As SK Networks is an affiliate company of SK Telecom, a 144a deal would have necessitated a full regulatory filing with the US SEC.

The group raised $184 million from the offering, which comprised 9.65 million ADR units. The sale was completed at $19.05, which represents a 5.2% discount to the ADR's close on Tuesday and a 6.2% premium to the local close on Wednesday. SKT shares had risen 0.5% over the course of Korea's trading day to Won186,000.

The deal was complicated by the fact that SKT has hit its foreign shareholding limit of 49%. The company has been unable to create new ADR's and the new deal comprises ADR's SK Networks had previously bought back from the market. Its remaining 1.8% stake in the company is held in common share format.

A lack of paper for offshore investors means that a premium has opened up between the ADR and common share since January. At its peak in February, the premium climbed to as high as 14% before slipping back to 4% by the end of March. Over the past month, it has averaged 10% to 12%.

At Tuesday's close, the premium stood at 12.93%, which means SK Networks chose a window when the premium was at a high. This, combined with the long lock-up period, is the main reason why a superficially generous discount was needed.

Order books were left open for one hour and closed about two-and-a-half to three times oversubscribed, with participation by 50 investors. Bankers report that roughly half the deal went to hedge funds and half to long only funds. Many prospective long only funds were unable to participate in the deal because they cannot buy restricted securities.

By geography, about 55% of the deal is said to have been placed in Europe and the remaining 45% in Asia.

Bankers believe the deal shows investors are still willing to participate in the primary equity markets if the name is right. A deal for SKT worked for two reasons.

Firstly, the company is almost universally on the buy list of research houses. Secondly, it has been foreign buyers, which have been the main drivers of trading on the KSE.

Year-to-date SKT is down 6.5% compared to a 6% decline in the KSE. The stock is currently trading at about 7.7 times 2004 earnings and the new deal represents nine days trading and about 5% of the ADR float.

SK Corp, which owns 50% of SK Networks, is the biggest shareholder of SK Telecom, with a 21% stake. The remainder is in freefloat.

Analysts believe earnings will be strong over the coming few quarters, largely because the company has been able to reduce its marketing costs. Most also point out that SKT will lift its dividend yield from 3.5% to 5% in the second half of the year when it pays a planned special dividend.

In late May, the company also completed a $329.5 million convertible, which was structured to monetize 2% of Treasury shares in anticipation of returning funds to shareholders. The convertible was led by CSFB and Lehman Brothers. Today it is trading at 103%/104%.