LS Cable & System issued 500 billion won in exchangeable bonds (EB) using equity in its subsidiary Gaon Cable to expand its North American business.
The fundraising is being assessed as strategic capital allocation that uses equity in a solid subsidiary to push the corporations' new business expansion. In a high interest rate environment, the company effectively raised a large sum at zero interest, easing its expense burden, and it also served as a chance to reconfirm the upside potential of Gaon Cable(000500)'s share price in the market.
According to the Financial Supervisory Service's electronic disclosure system on the 15th, LS Cable & System held a board meeting on the 10th and decided to issue 500 billion won in unsecured privately placed exchangeable bonds. An EB is a bond with the right to exchange it for specific stock. The exchange target is 1,851,851 common shares of subsidiary Gaon Cable, and the exchange price is 270,000 won per share.
◇ LS Cable & System, effectively borrowing 500 billion won at zero interest… the secret is "call option"
LS Cable & System cut its capital expense sharply by issuing the bond with a 0% coupon and maturity interest rate. Given that the yield on unsecured three-year corporate bonds (AA-) stood at 4.688% on the 11th, a simple calculation suggests LS Cable & System saved about 23 billion won in annual interest expense.
Instead, investors were given a call option (early redemption right) to exchange the bond for Gaon Cable shares whenever they want. If Gaon Cable's closing price exceeds 150% of the exchange price (270,000 won) for 10 consecutive trading days, bondholders can purchase Gaon Cable shares at the exchange price by exchanging all or part of the EB starting Nov. 9, the issue date.
Analysts say Gaon Cable's strong growth prospects enabled LS Cable & System to issue the EB on favorable terms. With the exchange price set at 270,000 won per share, EB investors appear to be betting on Gaon Cable's share price gains. Gaon Cable closed at 243,500 won on the 14th.
◇ Gaon Cable courted by U.S. big tech… bus ducts are at the center
Gaon Cable is a listed subsidiary of LS Cable & System that manufactures and sells power and telecom cables. Recently, through its U.S. subsidiary LSCUS, it has been supplying power cables and bus ducts (Bus Duct) to global big tech companies. According to KB Securities, as of late Aug., Gaon Cable signed long-term supply agreements (LTA) worth more than 5.5 trillion won in bus ducts with five big tech firms.
A bus duct is a power distribution facility that allocates large amounts of electricity inside data centers. Demand is rising as AI data center construction expands, and profitability is higher than that of traditional power cables. KB Securities analyzed that bus ducts' profit margin (15%) is higher than existing power cables' (2–3%).
Brokerages expect Gaon Cable to expand not only in bus ducts but also in distribution cables. Currently, LSCUS installs and sells bus ducts produced by LS Cable & System while also producing distribution and transmission cables on its own. Gaon Cable is the only domestic company operating a power cable production plant in the United States.
Kim Seon-bong, an analyst at KB Securities, said, "The most important factor when a power company enters the North American market is building credibility by securing references," and projected, "In addition to bus ducts, performance in AI DC distribution cables is also expected to increase."
In fact, Kiwoom Securities(039490) and KB Securities, which underwrote this EB, are also said to have highly valued Gaon Cable's North American AI data center business growth potential. Kiwoom Securities and KB Securities each underwrote 100 billion won of the EB. The remaining 300 billion won was underwritten by vehicles such as the Kiwoom·Brain Asset Management private equity partnership and the Mirae Asset·Brain Asset Management partnership.
◇ LS Cable & System to invest 500 billion won in North America
LS Cable & System plans to use the 500 billion won raised this time to expand its North American business. Although it did not disclose the specific uses, the industry expects the funds to go into North American power infrastructure investments such as a U.S. submarine cable plant and bus duct production facilities in Mexico.
LS Cable & System is targeting the ultra-high-voltage transmission market through LS Green Link and LS Marine Solution, and the AI data center power infrastructure market through Gaon Cable. LS Green Link is building a submarine cable plant in Virginia for $681 million (about 1 trillion won), and in Jan. this year LS Cable & System also invested about 230 billion won in its Mexican production subsidiary LSCMX to expand bus duct capacity.
In particular, LSCMX's capacity expansion is expected to boost Gaon Cable's North American bus duct business growth. Jo Jae-won, an analyst at Kiwoom Securities, said, "Once LSCMX completes its bus duct plant, production capacity (CAPA) will expand two to three times compared with now," and projected, "Given the scale of contracts already signed, within one to two years LSCUS bus duct revenue could grow to about 1 trillion won annually."
However, the heavy debt load is a burden. As of the end of June this year, LS Cable & System's total liabilities stood at 8.2709 trillion won, about 3.7 times its total equity of 2.2128 trillion won. Of that, current liabilities due within one year amount to 7.1735 trillion won.