Son of founder sells bulk of his stake in Hyosung Corp

The deal raises $116 million after decent demand allows the price to be fixed above the mid-point. But the discount to the latest close is still 7.1% and the Korean conglomerate has fallen almost 25% this year.
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Hyosung promoting its business at a festival in Changwon, Korea
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<div style="text-align: left;"> Hyosung promoting its business at a festival in Changwon, Korea </div>

A member of the founding family has sold most of his shares in Hyosung Corp through a block trade, raising W126 billion ($116 million). The deal was launched and completed after the Korean market closed yesterday — two days after the Korean conglomerate reported worse-than-expected fourth quarter earnings.

Hyosung is mainly active in the manufacturing of industrial materials, synthetic textiles and other chemical products, as well as general trading businesses, but also has a number of other business lines. In Korea it is well-known for its ATM machines.

Its share price dropped 7.3% on Wednesday and another 1.2% yesterday, but a source said the sale was unrelated to the decline. The seller, Hyun-Moon Cho, is the second son of Hyosung’s founder and chairman, Seok-Rae Cho, but hasn’t been directly involved in the business, which is run by his father and older brother. Indeed, Cho has decided to leave the company altogether and in addition to selling most of his 7.1% shareholding he also announced yesterday afternoon that he is resigning his board seat.

The source said Cho will use the money to set up his own law firm.

To ensure sufficient support for the transaction, the shares were offered at a pretty steep discount — particularly for Korea — of between 6.2% and 9.7%. And perhaps more importantly, the bookrunner had also wall-crossed enough investors before launch to cover almost the entire deal.

The source noted that the discount range reflected the fact that it was important to Cho to raise the money, ie the deal had to be successful. He also didn’t want to the stock to trade badly because of his sell-down, as it is still his family’s business. The discount may also have been a bit extra generous to account for the fact that the Korean market is closed for a holiday today.

As it were, a number of investors did view the stock as a good enough buy at these levels — the share price has fallen 24.5% since the beginning of this year — and in addition to those who had agreed to buy the stock before launch after doing a fair bit of work on it, a number of other accounts also came into the deal.

In the end, about 50 investors participated in the transaction, and the bookrunner was able to fix the price above the mid-point, at W52,500. This translated into a discount of 7.1% versus yesterday’s close of W56,500.

Cho offered to sell 2.4 million shares, or 6,8% of the company, at a price between W51,000 and W53,000. The deal will reduce his stake to about 0.3%.

According to the source, the order book comprised a decent mix of international and domestic investors. On the international side the demand was not surprisingly skewed towards hedge funds, but including the domestic accounts, the split between long-only funds and hedge funds was pretty even, he said.

The Reg-S deal was open for a bit more than one-and-a-half hours and closed at 5.30pm Hong Kong time.

Goldman Sachs was the sole bookrunner.

Hyosung said on Tuesday that its operating profit fell to just W6 billion in the fourth quarter last year, down from W68.7 billion in the third quarter and well below the W87.4 billion projected by analysts. It attributed the decline to a “huge decrease” in sales by its trading division and a one-off charge in its construction division. It also noted narrower margins for chemical products, weak demand for tire chords, one-off expenses related to the restructuring of its steel chord plants in the US and Europe, and a depreciation of the Korean won versus the US dollar.

An analyst at Samsung Securities said he expects an increase in demand from downstream clients to lead to growth in sales volumes from the second half this year, but “with the power and industrial systems division set to generate another loss in the first half, the company’s earnings normalisation will likely be delayed.”

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