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Rights offering

Korean Air kicks off biggest-ever rights offer to finance Asiana takeover

By Feb 22, 2021 (Gmt+09:00)

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Korean Air kicks off biggest-ever rights offer to finance Asiana takeover

Korean Air Lines Co. has kicked off its 3.3 trillion won ($3 billion) rights offering, the biggest amount ever by any South Korean company, to help finance the carrier’s planned acquisition of local rival Asiana Airlines Inc.

According to the Korean flag carrier on Feb. 22, it will receive subscriptions from existing shareholders, including the employee stock ownership association, for the rights offer over two days – Mar. 4 and 5.

The company plans to issue 173.6 million new shares, an amount close to its current outstanding 174.2 million shares.

Despite the massive number of new shares to be issued, however, analysts expect that the rights offer will be well accepted by existing stock owners given the stock’s recent upward trend.

Korean Air’s shares finished down 1.1% at 28,200 won on Monday. That represents a 48% premium compared to the expected rights offer price of 19,100 won. 

Korean Air will set the exact share price for the rights offer on Feb. 26 and list the new shares for trading on the Korea Exchange on Mar. 24.

Seven brokerages, including Samsung Securities, Korea Investment & Securities and KB Securities, are managing the carrier's rights offering.

FRESH FUNDS FINANCE EVEN BIGGER DEAL

Industry officials say the carrier’s stock price has been boosted by expectations that a successful rights offer will enhance Korean Air’s competitiveness as Korea’s sole full-service airline.

Of the fresh funds of 3.3 trillion won to be raised from the new share sale, Korean Air plans to spend about 1.5 trillion won ($1.4 billion) to acquire Asiana Airlines – a deal that would create the world’s seventh-largest airline.

Korean Air began on-site due diligence on Asiana in January for a two-month period and the acquisition is unlikely to face serious hiccups as the union of the two carriers is a government-led deal.

Also brightening the outlook for a successful rights offer, Korean Air eked out a decent profit last year despite the industrywide slowdown caused by the COVID-19 pandemic.

Earlier this month, the carrier offered a positive earnings surprise for 2020, posting 238.3 billion won in operating profit amid a drastic drop in passenger flights, which forced many of its global peers to turn to heavy losses.

Analysts expect Korean Air to perform better in the post-pandemic era, with synergy to be created by the acquisition of Asiana.

Korean Air kicks off biggest-ever rights offer to finance Asiana takeover

SHARE OVERHANG CONCERNS

There are worries that Korean Air’s share price may fall even if the company successfully completes its latest rights offering, which follows a 1.13 trillion won new share sale in July 2020.

Market watchers say some shareholders may be tempted to sell part of their newly purchased stocks just after the rights offering in order to book gains.

Hanjin KAL Corp., the parent of Korean Air, is set to buy 41.88 million new shares from the planned rights offer and widely expected to hold them as the carrier’s largest shareholder.

There’s also a one-year lockup period for the 34.72 million shares allotted for Korean Air’s employee stock ownership association, barring them from selling new shares until late March of 2022.

Still, some 90 million new Korean Air shares could flood the market upon listing on the main bourse, raising fears among investors of a significant share price drop.

The 90 million new shares amount to nearly 26% of Korean Air’s total outstanding shares following the planned rights offering.

Write to Jin-Seong Kim at Jskim1028@hankyung.com

In-Soo Nam edited this article.

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