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Has M&A frenzy returned to the Seoul corporate market?
The answer may be yes if you look at the latest development in Korea’s corporate landscape, where a growing number of local companies are rushing to sell some of their subsidiaries as part of the government-forced corporate restructuring drive.
But it remains to be seen whether the latest fire-sale drive will be met with enough demands from potential buyers and investors who are less eager to go shopping than the desperate companies are to sell.
It all started when the Korean government last year accelerated a drive to push highly leveraged local companies to restructure themselves and shore up more cash, so that the companies would emerge stronger and healthier from the current economic slump.
Since then, creditors of major Korean companies have started pressing prominent corporate borrowers to restructure and improve their cash conditions, warning they would not get a loan extension and would face shrinking financial support.
For now, nine local business groups - Kumho Asiana, Dongbu, Tongyang, Aekyung, GM Daewoo, Taihan Electric Wire, Hynix Semiconductors, Eugene and Daeju - are the first in line to sell some of their lucrative subsidiaries to pump more liquidity into their crumbling balance sheets.
The nine companies recently signed agreements with major lenders, most notably state-run Korea Development Bank, to improve their financial structure. Indeed, Kumho Asiana Group, the nation’s 10th largest conglomerate, already announced this week it would sell Asiana IDT, a computer network solution provider, and Kumho Auto Lease to two unnamed companies for about 170 billion won ($134.1 million) and 19.5 billion won, respectively. Kumho for now is in the most desperate position since it has a daunting task to prepare more than 4 trillion won for its joint investors in the takeover of Daewoo Engineering & Construction.
Kumho, in the highly leveraged 2006 takeover deal, asked 18 local financial firms to buy a 40 percent stake in Daewoo for more than 3.5 trillion won on Kumho’s behalf. Back then, Kumho had promised to buy back the shares for 31,500 won apiece three years later if the Daewoo share price failed to climb to that level by 2009.
Now Daewoo’s share price hovers around 12,000 won, meaning investors will definitely ask Kumho to buy back the stake at the promised price, meaning Kumho needs to squeeze out as much cash as possible for the enormous share buyback.
Now creditors led by KDB are telling Kumho that it will have to sell Daewoo if it fails to find a new investment partner by the end of June.
“The chances are pretty low for Kumho to find another investor who will come to its rescue at this point,” said Byun Sung-jin, analyst at Mirae Asset Securities.
Nonetheless, Kumho Asiana is still trying hard, as it is planning to sell even more subsidiaries like Kumho Life Insurance and the Seoul Express Bus Terminal to obtain more cash.
Kumho is hardly alone in its somewhat forced rush to put up its subsidiaries for a fire sale. Dongbu Group, the 19th-largest conglomerate here, is also busy negotiating prices for its subsidiary Dongbu Metal, which market analysts value at about 700 billion to 800 billion won, with KDB’s private equity fund.
Dongbu Group’s subsidiary Dongbu HiTek, the sole stakeholder in Dongbu Metal, has borrowed more than 1 trillion won from lenders, including Korea Development Bank, but has been unable to pay back some of the debts amid eroding earnings.
Taihan Electric Wire is also in a bad position. It is battling to obtain more cash by selling its subsidiaries like computer rental company Korea Rental, textile manufacturer Try Brands and Daimyung TMS.
“Taihan Electric Wire has secured some liquidity by issuing new bonds and stocks and by selling Taihan ST to Posco last month,” said one representative at Hana Bank, Taihan’s major lender, who declined to be named. “The group will secure more cash by selling other assets and subsidiaries.”
But other big-ticket shopping items like Hynix Semiconductors, Hyundai Corp. and Daewoo Marine and Shipbuilding, which were sold in the wake of 1997-98 Asian financial crisis, are also awaiting new owners.
Min Euoo-sung, the head of KDB, recently said the sale of Hyundai Corp “will be wrapped up in the latter half of this year,” while the sale of Hynix may take more time.
What remains a big concern is the big gap between expectations from sellers and buyers, according to one M&A adviser at a Seoul stock brokerage house who declined to be named.
“What companies seeking M&A hate most is uncertainties,” said the expert. “There won’t be a whole lot of companies willing to plunge into M&A deals at the moment.”
He said potential buyers and sellers, especially under uncertain economic conditions, tend to have “wildly different expectations in what they believe is an ideal price,” which makes it even more difficult to strike good acquisition deals. Kil Ki-mo, analyst at Goodmorning Shinhan Securities, said there are very few major business groups that seem to be capable of taking the plunge into massive acquisition deals.
Another major stumbling block is that sellers are not very eager to release precious subsidiaries, either. The recent sales drive has been envisioned and pushed by the government and state-run KDB, which was at the forefront of the country’s state-led industrialization in the past. The government has argued Korean firms are in urgent need of restructuring and will emerge as stronger and healthier enterprises
“We have to think about the post-crisis years, and companies hoping to become global players cannot compete with heavy, unhealthy bodies,” Min said in a press conference last month. “They first need to lose some weight by readjusting their assets through subsidiary sales, and later invest aggressively in new areas and launch other new acquisitions.”
But a top-down approach to reassemble the nation’s corporate landscape, certainly not unheard of in Korea, has drawn grumbles from many of the targeted firms. And some of the companies are dragging their feet as they believe the worst nadir in the nation’s economy has increasingly become a bygone. But what seems to be a very painful process for now may prevent the companies from becoming the next GM or next Chrysler, said some experts.
“The current state-led restructuring efforts are largely pre-emptive actions to root out possible crises to come in the future if companies don’t change themselves now,” said Chun Hyo-chan, analyst at Samsung Economic Research Institute.
