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South Korean issuers should rise to the IPO bait

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By Rashmi Kumar
29 Jul 2014

South Korea’s Cuckoo Electronics priced a blockbuster W255bn ($248m) IPO this week that saw the institutional tranche close to 600 times covered. But others looking to emulate it need to act sooner rather than later. With Samsung Group set to raise large amounts of equity later this year, they risk losing out.

The South Korean IPO market has had a slow start this year. So far, just 13 deals have priced for a collective $707.2m — of which only two were bigger than $50m, according to Dealogic. In contrast, by this time last year 16 companies had already listed.

Volumes rose in the second half of last year, thanks to Hyundai Rotem, part of conglomerate Hyundai Group, listing in October with a $585m IPO. But the large size of its capital raising meant that those that followed in its wake managed to raise just a measly $250m.

The numbers are certainly startling, but that is the nature of Korea’s equity market. It is mostly dominated by multinational family-controlled conglomerates, or chaebols, which pretty much hold the market together. From Samsung and Daewoo, to Hyundai and Kia Motors — the brands epitomise the country.

This is unlikely to change anytime soon, but now is still an opportune time for smaller companies to tap the equity market.

The most compelling argument is to take advantage of the abundant liquidity that is so obviously available. The IPO of Cuckoo Electronics, which priced this week to raise W255bn, saw some 700 institutional investors jump in. All but two of the bids came in at the top of the range.

The 600x oversubscription speaks volumes about the appetite among investors — foreign and domestic — for South Korean credits. But companies simply sitting on the sidelines should be armed with the knowledge that liquidity can deplete pretty quickly, especially if big names like Samsung enter the market.

And that is likely. Samsung patriarch Lee Kun Hee is ailing and has been hospitalised for the last three months. The family is already considering how to finance its eventual inheritance tax bill, which could come to some $6bn. One proposal under consideration is to take two of the Samsung subsidiaries — Samsung SDS and Cheil Industries (previously called Samsung Everland) public. Stakes in other businesses could also be sold through block trades.

Bankers predict the Samsung deals will hit the market in the last quarter of the year, which means other companies looking to list their shares need to get in ahead of this onslaught. If not, the danger is that Samsung will suck up most of the liquidity.

First movers will certainly have the advantage. Issuers in sectors such as technology and retail, as well as those with a strong China growth story, are expected to be a hit among investors keen for a chance to diversify away from the industrial sector.

Corporates need to make their move. It’s only if these cash-hungry firms come out to list will investors see that there are plenty more fish in the sea.

By Rashmi Kumar
29 Jul 2014