Watt a mandate

Kepco mandates UBS Warburg, JPMorgan and Daewoo Securities to advise on the sale of its power generation companies.

In what is probably the most prestigious mandate to come out of Korea in 2002, JPMorgan, UBS Warburg and Daewoo Securities have been mandated to advise on the sale of Kepco's power generating companies.

Kepco has six generating companies - or gencos - although one of these is a nuclear power company and will not be sold to the private sector. The other five are set to be sold off, and collectively produce 33,000 megawatts. The sale of the five gencos could raise as much as $13 billion, with all five sales due to be completed by 2004. Proceeds will be used by Kepco to pay down debt, a move that has credit analysts very excited.

JPMorgan, UBSW and Daewoo Securities have been mandated to execute the first sale and create an overall plan for the sale of the other four.

Each of the five gencos are of a roughly similar size, and are thus worth around $2.5 billion each.

Korean officials are apparently keen on sales that would involve selling 80% in a trade sale (via an auction) and then launching an IPO for the remaining 20% and reserving a portion for employees. However, some observers believe that a full trade sale to an international utility would be the best means of bringing new technology and international best practice to the Korean power sector.

These are attractive assets, given Korea's economic growth potential and the country's enormous industrial use of electricity. Companies that are understood to be interested in bidding for the first genco include Mirant, El Paso, NRG, China Light & Power, Tractebel, BP, Shell and local conglomerates, LG and Samsung. Few imagine it will be a particularly challenging sale. "There is a very good track record of electricity demand in Korea which makes it easier to predict demand patterns, so these are attractive assets," says Simon Black, a partner at Allen & Overy.

The Koreans are keen to maintain competition among the gencos - as they wish to make the pool pricing as effective as possible. As such, the international utilities will only be allowed to bid for one genco each.

A model for the process is the UK. However in Britain, one of the unforeseen aspects of privatization and deregulation, was the spate of mergers among the new gencos in the succeeding years.

While no Korean regulations or laws appear to have been promulgated that restricts the gencos from merging, it is definitely an issue on the government's mind. One thing to bear in mind is that Korea has an antitrust body that could veto any genco mergers if it considered them anti-competitive.

Possibly, the only major worry for JPMorgan, Daewoo Securities and UBSW - which has done almost every bond issue for Kepco - will be how the unions will react to the forthcoming sales. Indeed, Kepco was beset with massive industrial action earlier this year, and an election is due towards the end of 2002.