By Anna J. Park
As the country's IPO market is continuing to heat up with investors' increased interest in newly listing firms, it seems there is a new formula for a successful initial public offering: first, spin off the most lucrative business sector as a subsidiary from a parent company, and second, conduct the IPO of the subsidiary firm.
Previously, most listed firms in need of a cash inflow and investment chose the path of issuing corporate bonds or new stocks. Mezzanine financing ― a hybrid form of raising capital utilizing both senior debt and equity issuance ― has been frequently used to raise necessary capital for a firm's growth.
However, the recent trend of spinning off part of a business that is full of growth potential and undergoing an IPO, seems to not only benefit the newly created subsidiary but also appears to raise the corporate value of the parent company.
ECOPRO and Nepes cases
Eco-friendly materials and parts company ECOPRO is one of such cases following the formula. ECOPRO's secondary battery unit with expertise in cathode materials spun off from the company back in 2016.
ECOPRO BM, the newly created subsidiary of ECOPRO focusing on battery materials, then went public in early 2019, raising some 170 billion won ($150 million) through the initial public offering. The battery materials company's market cap size has now grown to about 4 trillion won ($3.6 billion) as of Wednesday.
This is more than a five-fold growth from in the two years since its market value was estimated at between 720 billion won and 825 billion won at the time of preparing the IPO. The market cap of ECOPRO ― the parent company ― has also doubled over the past two years.
Nepes, local semiconductor tech company, is also following a similar path, as it completed a physical division of its semiconductor testing subsidiary "Nepes Ark" in April in 2019. Nepes Ark made its successful debut on the tech-heavy KOSDAQ market in early November last year and the corporate value of both Nepes and Nepes Ark has been showing an upward trend since.
SK Innovation and LG Chem following suit
Big-time players are no exception in following the trend.
Materials and parts company SK IET (IE Technology) was spun off from SK Innovation in April 2019, and is now preparing an upcoming IPO during the first half of this year. The company explained that the rationale behind the separation was to swiftly respond to the fast-changing global business environment by enhancing its market expertise in the components and parts sector. The move has been positively received by the market as a signal from both companies to focus on their comparative strengths even more.
LG Chem's physical division of its lucrative battery unit LG Energy Solution and its plan to list the firm on both the KOSPI and Nasdaq in the near future drew significant media and investor attention at the end of last year. The chemical company's plan to increase the global competitiveness of the battery unit by newly creating a separate subsidiary first met with severe opposition from shareholders, as they expressed concerns as to whether the parent company's value could be maintained without the most lucrative business sector in place.
Yet LG Chem's bullish stock price move showed the market's approval of the strategic plan; the firm's market cap rose to some 70 trillion won as of Wednesday, a whopping 24 trillion won jump from last autumn when the decision was made.