Woori mandates ADR, finally

Seven months later than expected, KDIC selects leads for Woori sale.

Investment bankers have been waiting for Woori for a long time. The Korean financial holding company which is 80% government-owned was originally expected to launch a $1 billion ADR back in June, but with equity markets tepid and North Korea making a lot of noise, the deal got delayed.

A level 2 ADR was filed in the autumn via Lehman Brothers and Samsung Securities and this resulted in Woori Financial Holding getting its US GAAP and financial reporting in order. Yesterday, the government finally mandated lead managers for a level 3 ADR, which will see the government sell down its stake.

Not surprisingly Lehman (a shareholder of Woori) and Samsung Securities retained their place on the offering. However, two more firms were added. They are up and coming Korean firm, Dongwon Securities and CSFB, which has long held FinanceAsia's award for Best Foreign Investment Bank in Korea.

For CSFB this could be a particularly satisfying victory since the government is intent on selling down its 80% stake and this is thought to be worth around $3 billion. The stake is held through the KDIC and by law KDIC is supposed to sell the stake by the end of 2004.

Most bankers now think that an unrealistic target, but it suggests the deal cannot be delayed much longer. According to sources who met Woori's management only a couple of weeks ago, the bank was then hoping to launch the ADR in early December to get the process underway.

However, with the LG Card situation breaking (of which Woori is the most exposed lender) and news that China Life is still ploughing ahead, it looks highly unlikely that Woori could pull off a deal so quickly, even though all the paperwork is in place.

The deal itself will be for 15% to 30% of the bank. Indeed, earlier this year when FinanceAsia met Jang Chang-Sung who was responsible for the sale at the KDIC he admitted, "the ADR has to be of a substantial size because of the 2004 deadline."

This puts the deal in the $500 million to $1 billion range, with most bankers now slating it for the first quarter of next year. Its likelihood of success will be aided by the prospect of large amounts of new money being committed to Asian equity markets in the first quarter, with January predicted by most ECM bankers to be a very busy month.

However, Woori is unlikely to be a slamdunk except in the most bullish of market conditions. Bankers have long advised the government to sell a strategic stake in the bank to aid the marketing process, or else remove some of the government overhang via a mandatory exchangeable bond.

What is certain is that selling 80% of a bank the size of Woori in a short space of time (a year) is no cakewalk for the KDIC - especially as Korean government entities are always under excruciating pressure to get the highest price possible. Woori is a bank that was created from the fallout of the Asian financial crisis, with Hanvit at its core.

The bank has done a decent job of rebranding, but some confusion reigns over who is really in charge, given the financial holding company and the bank both have somewhat independent managements, according to those familiar with the situation. In the manner of its creation, and its size, Woori is somewhat akin to a Korean equivalent of Bank Mandiri, and the fact that that equity deal was executed successfully by CSFB earlier this year, may be one factor in the decision to mandate it.

The bank's stock is currently trading at W6700, having hit a high this year of W7750 and a low in the last 52 weeks of W3900. Its current market capitalization is around $4.4 billion. The bank enjoys a strong deposit base and has strong margins, supported by W7.6 trillion of KDIC bonds.

However, it has problems with its credit card business, with UBS estimating it has credit card bad assets of W1.8-2 trillion and estimating further provisions of W500 billion will need to be made beyond the third quarter. UBS puts a fair value of W7100 on Woori Financial Holdings, based on an assumption of one times simple adjusted book value (as compared to its valuations of 1.3 times for Shinhan and 1.5 times for Kookmin).

It estimates the bank will finish 2003 with a return on equity of 8.9% and a cost to income ratio of 43% on revenues of W4.9 trillion and net income of W532 billion. UBS sums up Woori as a "solid franchise" with "uncertain asset quality".

Thus for the investment banks involved the challenge of selling the Woori story will not be small, but the rewards from follow-on business could make it worthwhile. In its favour the Korean banking sector is viewed by some fund managers as undervalued and Woori as the bank stock with the most potential on the upside.

Bankers in Korea additionally hope that government policy to slow down the housing market will drive money into the stock market - which would be welcome given that Korea's market is now the cheapest in Asia trading at an overall PE of around six times.

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