CJ CGV's rights offer drags down other CJ unit shares

A promotional image of CJ CGV multiplexes / Courtesy of CJ CGV

By Anna J. Park

Upon the announcement of CJ CGV's 1 trillion won ($767 million) paid-in capital increase plan earlier this week, the stock prices of CJ CGV, as well as other CJ subsidiaries and holding company, have plunged this week, showing markets' deteriorated investor sentiment over the plan.

According to the Korea Exchange (KRX), the bourse operator, CJ CGV's stock price closed at 9,950 won on Friday, a fall of 5.24 percent from the previous session. After the film multiplex chain announced the capital increase plan on Tuesday, its stock price logged a three-day losing streak during the remainder of the week. The price nosedived by 21.1 percent on Wednesday, shed another 8.22 percent on Thursday and hit the 5.24 percent decline on Friday.

As a result, the stock price lost over 30 percent in just the last three daily sessions, hitting the all-time low level marked during the 2008 global financial crisis.

As the massive paid-in capital increase plan involves the participation of CJ, the holding company of the conglomerate, the stock prices of CJ as well as its affiliates also posted losing streaks this week.

The holding company's stock price ended at 71,800 won, a 1.37 percent fall from the previous session. The stock logged a five-day consecutive losing streak this week, losing over 10.8 percent this week alone, from last Friday's closing price of 80,500 won.

CJ Logistics also showed the same pattern of a five-day consecutive losing streak, finishing at 76,600 won, a fall of more than 5 percent from last Friday's closing price of 80,700 won.

The stock price of CJ ENM also lost over 8 percent since Tuesday. It ended at 72,700 won at Tuesday's closing, yet it fell by 5.5 percent on Wednesday and another 3.06 percent on Friday, finishing at 66,600 won.

CJ CGV to raise 570 bil. won via 3rd-party allotment, 450 bil. won through in-kind investment

The series of stock price plunges followed CJ CGV's announcement on Tuesday that it will embark on a large-scale capital increase, totaling 1 trillion won.

Of the total capital increase, 570 billion won will be raised through third-party allotment, which is a method of offering new stocks under which the board of a company determines to whom the newly issued shares will be allotted. A third-party allotment is usually chosen by companies that aren't attractive enough to raise enough capital through public offerings. Of the 570 billion won, 380 billion won will be spent on paying up debts, while the remaining 190 billion won will be used for facilities and operation fees. CJ holdings will inject 60 billion won for the third-party allotment capital increase.

The problem is that the planned 570 billion won is now larger than CJ CGV's market cap, which stands at 474 billion won at Friday's closing. Moreover, the third-party allotment plan shows that 74.7 million shares will be newly issued at a price of 7,630 won each. The number of newly issued shares will be 1.5 times higher than the entirety of the company's current shares at 47.7 million.

Separately from the third-party allotment, CJ will make an additional in-kind investment worth 450 billion won using the stakes of its subsidiary CJ OliveNetworks. Altogether, CJ CGV plans to raise over 1 trillion won, which the market perceives to be placing too much burden on the holding company, while diluting the value of the companies' stocks.

Still some market analysts point out the need to see a positive side of it: “Short-term uncertainty in the stock price of CJ CGV cannot be avoided, yet one needs to positively interpret the stabilization of the firm's financial structures through the capital increase,” Ji In-hae, analyst at Shinhan Securities, said.

“With regard to CJ, the company has a higher propensity of dividend payouts owing to solid performances of CJ Olive Young,” SK Securities analyst Choi Gwan-sun explained, adding that CJ's stock price plunge seemed excessive. The target price for CJ suggested by the analyst was 95,000 won.