Third time lucky for KDB's Posco sale

KDB has announced that it is relaunching the sale of its remaining stake in Posco.

The Korea Development Bank (KDB) has announced that it is to relaunch the stalled sale of its remaining 6.84% stake in Korean steel giant Pohang Iron and Steel Company (Posco). The sale will be done through the issuance of American Depositary Receipts. Officials at KDB have announced that marketing of the deal will begin on September 25. It is unclear if this will involve a roadshow. The officials said that they hope to complete the sale by mid-October.

This will be the second attempt that the bank has made to sell the stake via an ADR, after first pulling a domestic placement in December last year. In July this year, an ADR transactoin was postponed one day before it was due to close after it had been priced at $22.125. This price equated to a 2% discount to the previous day's closing price of the underlying Posco shares listed on the Korean Stock Exchange. This was unpalatable to the Korean national bank as it looked as if it was selling national assets to foreigners at a lower price than domestic Koreans would have to pay.

The pulling of the deal caused a furore of controversy at the time. "We shall not forget this," said one irate fund manager to at the time. Institutions were upset in that they had allocated capital to the sale and thought their orders were filled only to be told that they were getting nothing.

One source of support for this sale is that Nippon Steel from Japan could increase it strategic investment in Posco through the purchase of the ADRs. Nippon and Posco have a close strategic partnership with both firms saying that they want to own 3% of each other's shares. At present Nippon only owns 1% of Posco, therefore it could buy another 2% of the company by buying 29%of the new ADR issue. However, the lead managers of the sale, Salomon Smith Barney and Merrill Lynch, have denied that Nippon has placed any firm orders, although they concede that the Japanese firm could prove a useful source of demand.

Posco's ADRs are trading today at $20.5 on the New York Stock Exchange - a 9.3% premium to the underlying share price. This premium should facilitate the sale, although traders are expecting arbitragers to sell the ADR in expectation of buying them back cheaper when the new issue comes to market. The sale should raise around $550 million for KDB.

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