A Lucky Strike? Korea Tobacco GDR Faces Mixed Reception (fwd)

[Robert Weissman <rob@essential.org>]

A Lucky Strike? Korea Tobacco GDR Faces Mixed Reception
by Jame DiBiasio
Source: Emerging Markets Week, Friday, 11/5/99
November 8, 1999 VOL. VII, NO. 45

Even though active equity managers say Korea Tobacco & Ginseng’s global
depositary receipt issue isn’t exactly smoking, support from index
investors may light the deal up. KT&G embarked on a three-week road show
in Asia last week to pitch an issue of up to USD1 billion in GDRs. KT&G is
offering 28 million shares, or 15% of the company, to international
investors as part of its privatization program. Credit Suisse First Boston
and Warburg Dillon Read are global coordinators.

The deal is surrounded by naysayers. “After China Telecom’s USD2 billion
offering last month, bankers figured there’s still lots of investor
demand—but China Telecom is sexy,” says one investor in Singapore. “Korea
Tobacco is not sexy,” he asserts petulantly. Another investor at a U.S.
firm in Hong Kong intends to pass on the deal. The company’s goals are at
odds with those of the government. KT&G wants to cut costs and
restructure, which means closing factories and consolidating farm
suppliers, but the government wants to protect jobs. KT&G also needs to
raise prices, as the market is saturated and only price increases will
bring growth. But cigarettes are a key component to the government’s
inflation indices, and the government is keen to reduce inflation, note
several investors.

By contrast, Adrian Fu, portfolio manager at Investec Guinness Flight in
Hong Kong, likes the company’s story. The company holds 94% of Korea’s
cigarette market and will retain its grasp on distribution which is more
important, he says. Other fund managers add the listing will make KT&G the
sixth-largest Korean corporate, so index fund managers and big
institutional players looking for Korean exposure will buy the deal.

Daniel Ghill, head of share sales at KT&G, says the company has already
shuttered factories and can do so again. Also, cigarette prices in Korea
are far below those in other Asian or Western countries, so there is room
to boost them, he believes.

Nevertheless, fund managers in Hong Kong and Singapore say they want to
see new shares offered at KRW27,000-28,000, a discount to the outstanding
price, but the price at which domestic shares were floated in Seoul last
month. CSFB and Warburg bankers declined to comment on the deal or
pricing.