Early January Global Investor IR
High Internal Transaction Ratio 'Weakness'
Samsung SDS Stock Slump Also Negative Impact
Possibility of 2nd Largest Shareholder Exit
LG CNS will begin roadshows targeting domestic and international institutional investors participating in the demand forecast for its initial public offering (IPO) starting early next year. Ahead of the full-scale investor recruitment, the political instability triggered by the emergency martial law situation has cast a shadow. Factors such as a high proportion of internal transactions, the poor stock performance of peer company Samsung SDS, and the possibility of an exit by the second-largest shareholder Macquarie PE are expected to influence the final offering price determination.
Global Investor IR from the First Business Day of Next Year
According to the investment banking (IB) industry on the 9th, LG CNS plans to conduct domestic and international investor relations (IR) activities with the underwriting consortium for the demand forecast scheduled for January next year. Since major overseas investment institutions are currently on year-end holidays, the company decided to start IR activities in earnest from the first business day of the new year. Shin Shin-kyun, the newly appointed CEO, will lead the domestic and international IR efforts.
The underwriting consortium, led by KB Securities as the lead manager, will market to domestic and foreign institutional investors, while foreign underwriting firms such as Merrill Lynch and Morgan Stanley will target global investors in locations including Hong Kong, Singapore, and New York.
LG CNS and the underwriting consortium have the mission to convince global investors of a corporate value worth approximately 6 trillion KRW. The final desired offering price proposed by LG CNS ranges from 53,700 KRW to 61,900 KRW. A total of 19,377,190 shares, combining both existing and new shares, will be offered. Based on the desired offering price, the estimated corporate value (market capitalization) ranges from the low 50 trillion KRW level to a maximum of 60 trillion KRW.
Over 60% Affiliate Sales Ratio Limits Growth Potential
The issue expected to have the greatest impact on the final offering price determination is internal transactions. LG CNS is a company responsible for the IT systems of LG Group affiliates, and the proportion of sales to affiliates is high in total sales. As of the end of the third quarter this year, sales generated from group affiliates accounted for 62.4% of total sales. Although the proportion has fluctuated over time, it has generally remained slightly above 60%.
A high proportion of internal transactions can be interpreted as an advantage in securing stable sales channels. However, investors tend to view the company’s growth potential as limited due to its weak sales base outside of affiliates. A representative from an asset management firm commented, "IT service companies affiliated with large conglomerates inherently have limitations."
To supplement growth potential, LG CNS announced plans to use a significant portion of the funds raised through the IPO to acquire overseas IT service companies. They plan to spend a total of 330 billion KRW on M&A: 180 billion KRW in 2025, 110 billion KRW in 2026, and 40 billion KRW in 2027. This accounts for more than half of the 500 to 600 billion KRW expected to be raised through the IPO. The strategy is to expand influence in the global market through these acquisitions.
An official from the underwriting consortium explained, "Compared to most large conglomerate-affiliated IT service companies, which have affiliate sales ratios of up to 80%, LG CNS’s affiliate sales ratio is relatively low." The official added, "They are continuously expanding sales outside of affiliates by attracting customers such as Coupang."
Variables Including Samsung SDS’s Poor Stock Performance and Macquarie PE’s Exit Possibility
The poor stock performance of Samsung SDS, a leading company in the same industry, is also expected to negatively affect the demand forecast. Samsung SDS was listed on the KOSPI market in 2014 with an offering price of 190,000 KRW. After rising to 429,000 KRW shortly after listing, it has been on a long-term downward trend over the past decade and is currently trading in the 130,000 KRW range.
Last year, the stock rebounded due to the expansion of the IT service market including artificial intelligence (AI) and data centers, but this year it has declined again due to poor performance of its core affiliate Samsung Electronics. Recently, the stock has struggled, falling more than 7% in a single day amid the emergency martial law situation involving President Yoon Suk-yeol.
An IB industry insider said, "LG CNS selected Samsung SDS, Hyundai AutoEver, and NTT Data Group as comparable companies when determining the desired offering price," adding, "Most of these companies’ stock prices have been declining recently, which could negatively impact the January demand forecast." The insider also noted, "The three selected comparable companies are considered significantly overvalued based on PER, which could be a discount factor for LG CNS."
The possibility of an exit by Macquarie PE, the second-largest shareholder, is also expected to weigh down the offering price. The largest shareholder, LG, previously held an 85% stake in LG CNS but sold a 35% stake to Macquarie PE for 950 billion KRW in 2019 due to regulations on internal transactions.
Macquarie PE plans to sell about one-third of its stake during this IPO process. A lock-up agreement will be set for six months during which the remaining shares cannot be sold. However, since the purpose of LG CNS’s listing was Macquarie PE’s exit, long-term investors must bear the risk of a large volume of shares being released to the market.
An investment institution official said, "It is understood that LG CNS expected a maximum corporate value of 10 trillion KRW when pursuing the listing," but added, "However, with multiple negative factors overlapping, it is not impossible for the value to fall to around half, about 5 trillion KRW."
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