Korean shipbuilding giants heading toward merger

Hyundai Heavy Industries Co., the world's largest shipbuilder, plans to bid for a 3.35 trillion won ($3.1 billion) controlling stake in Daewoo Shipbuilding & Marine Engineering Co. in what may be the industry's biggest acquisition.

A preliminary offer will be submitted Wednesday, Ulsan, South Korea-based Hyundai Heavy said today in an e-mailed statement, without providing more details. The value of the stake is based on today's closing price of 34,700 won a share in Seoul.

Hyundai Heavy will compete with Posco, GS Group and Hanwha Group for the 50.4 percent holding being sold by state-run Korea Development Bank and Korea Asset Management Corp. The successful bidder may end up paying more than double the value of the stake following Hyundai Heavy's offer, analyst Song Sang Hoon said.

"This was unexpected and will drive up the sale price," said Song, who has a "buy" rating for Daewoo Shipbuilding shares at Kyobo Securities Co. in Seoul. "The bidding price could reach about 7 trillion won."

Hyundai Heavy, which initially told local media it wasn't interested in the purchase, will probably seek to expand its business of offshore oil-exploration structures through the purchase, Song said.

The bids will be closed Wednesday and a preferred bidder will be announced in October, Korea Development Bank has said. Morgan Stanley is advising Hyundai Heavy on the transaction.

Daewoo Shipbuilding, the world's biggest builder of vessels used for drilling oil in deep waters, aims to secure this year a record $6 billion in offshore projects, including drill ships and semi-submersibles.

Soaring crude oil prices and depleting reserves in shallower waters are encouraging companies including Petroleo Brasileiro SA to boost investment in exploration and production. The Brazilian company has leased about 80 percent of the world's deepest offshore drilling rigs, causing a shortage and raising prices.

Local media, including MoneyToday, had reported earlier Hyundai Heavy was not interested in bidding for Daewoo Shipbuilding, citing Vice Chairman Min Keh Sik.

The takeover could also help Hyundai Heavy reduce material costs as it combines with its affiliates to buy steel plates used to make ship hulls, said Lee Jae Kyu, an analyst at Mirae Asset Securities Co. in Seoul.

"The savings will be considerable," Lee said. Steel plates cost about 15 percent of a shipbuilder's annual sales.

Hyundai Heavy plans to use about 3.8 million tons of steel plates this year together with Hyundai Mipo Dockyard Co. and Hyundai Samho Industries Co., the world's fourth-biggest and fifth-largest shipbuilder. That's up from 3.2 million tons in 2007 as they clear backlogs with deliveries stretching into 2012.

Posco, Asia's third biggest steelmaker, will submit a letter of intent for the Daewoo Shipbuilding stake, company spokeswoman Ko Min Jin said. GS Group and the Hanwha Group will also hand in their proposals.

South Korea's National Pension Service, the nation's largest investor, said Aug. 19 it may spend as much as 1.5 trillion won to make a joint bid for Daewoo Shipbuilding. The fund has been in talks with companies that have shown interest, including Posco.

Daewoo Shipbuilding has received about $11.6 billion in orders this year, achieving 66 percent of its target of $17.5 billion. It posted a 13 percent increase in second-quarter profit of 115.3 billion won with sales climbing 52 percent to a record 2.63 trillion won.

The company's shares fell 4.9 percent to 34,700 won today, the most since Aug. 4.