SK E&S' $2 bn share deal draws slew of funding providers

KKR & Co. and three other private equity firms, shortlisted for SK E&S Co.'s new preferred shares worth 2 trillion won ($1.7 billion), are now fully backed by South Korean banks and brokerage firms. The financing providers' keen interest in the deal could raise the shares' value to as high as 2.4 trillion won, according to investment banking sources on Tuesday. 

The country's two biggest lenders Kookmin Bank and Shinhan Bank and top brokerage firm Samsung Securities Co. are among the financial institutions ready to finance the deal, which guarantees a steady return. Some of them offer to provide up to 70% of the share purchase with acquisition financing, higher than the typical 50%.

KKR, IMM Private Equity, IMM Investment and New York-based EMP Belstar will make final bids by the Oct. 6 deadline for the new shares in SK E&S, the largest city gas supplier in South Korea.

SK E&S, 90% owned by its holding company SK Inc., is selling the preferred shares to raise money for its hydrogen and renewable energy businesses and relevant acquisitions.

It will offer its liquefied natural gas (LNG) and city gas facilities as collateral of the new issues. SK E&S will redeem the shares with interest payments upon maturity.  

OPTION TO INVEST IN SUBSIDIARIES

Additionally, the preferred share buyers will be granted an option to invest in SK E&S' city gas subsidiaries five years after their share purchase. It drew  investors' attention because of the long-term and stable cash flow of the city gas suppliers, alongside the industry's high entry barriers. 

The sources said the preferred share deal would fall somewhere between infrastructure and corporate investments in terms of expected returns and the upside potential of the shares. It will also provide a good opportunity for the financial institutions to use up their 2020 investment funds which have yet to find targets.

In the early stages of the competition, the bidders suggested they pay about 2 trillion won for SK E&S' preferred shares, or 10 times earnings before interest, tax, depreciation and amortization (EBITDA) of its city gas subsidiaries offered as collateral. 

Now the intense competition among the funding providers could inflate the value of SK E&S' preferred shares on offer to 12 times the EBITDA of the collateral, or 2.4 trillion won.

"This deal is being led by acquisition financing providers," a domestic financial institution source told Market Insight, the capital news outlet of The Korea Economic Daily.

"If interest rates go up, we may suffer a negative spread. But this is an attractive investment given the collateral and the option to buy shares in its city gas subsidiaries," he noted.

Shortlisted Private Equity	Financing Provider
KKR	Kookmin Bank's infrastructure financing division, Hana Bank
IMM PE	Shinhan Bank, KB Securities, Korea Investment & Securities
IMM Investment	Kookmin Bank's IB division
EMB Belstar	Samsung Securities

Write to Jun-ho Cha at chacha@hankyung.com
Yeonhee Kim edited this article.