GS E&C, Hyundai eyeing Doosan Infracore

GS Engineering & Construction (E&C) and Hyundai Heavy Industries are eyeing taking a major stake in Doosan Infraore which is being put up for sale as part of Doosan Group's business normalization.

"GS E&C and Hyundai Heavy Industries are included on the shortlist to possibly purchase a major stake. Given their core strengths, it makes sense for either of the firms to participate in the upcoming bidding process," an industry source knowledgeable about the issue said Monday.

GS E&C is the country's top builder and it is also one of the biggest buyers of machinery products. Hyundai Construction Equipment is also affiliated with Hyundai Heavy Industries. It is unlikely Hyundai Heavy will face issues over a market monopoly as the country's machinery market is buyer-side oriented. "Because the local construction machinery market is multi-polarized with a lot of foreign companies competing for a share, any price increases will see buyers shift their sourcing to foreign companies," another industry official said.

For now, Hyundai Heavy is one of the strongest candidates ― with massive capital ― to acquire a 36-percent stake in Doosan Infracore valued as high as 1 trillion won.

Among the companies which have expressed an intent to bid Infracore are ― alongside Hyundai Heavy-KDBI and GS E&C-Dominus Investment ― Eugene Group, MBK Partners, Glanwood Private Equity and Eastbridge Partners.

"Financial investor such as MBK Partners would be given equal chance to look at Doosan Infracore. But it's very unlikely Doosan creditors will let PEFs close the deal, as these are mainly interested in initiating an exit-strategy if their target profits reach the level they want," said the sources. MBK Partners, for example, is still in dispute with unionized workers at Homeplus after it downsized the number of workers and launched a cash-out campaign by selling Homeplus assets.

The preliminary due diligence over the Doosan deal will be carried out for four weeks, and a preferred bidder will be announced as early as mid-November.

GS E&C's bet?

Some think GS E&C will be more aggressive, as the Doosan affiliate is an attractive firm with a strong reputation in manufacturing construction machinery. GS also has 1.9 trillion won in cash as of June this year, which makes a two-way fight between Hyundai Heavy and GS E&C over the takeover deal more feasible.

Despite GS' strong cash-generating power, the possible takeover of Doosan Infracore will still be a financial burden for the GS affiliate, according to KB Securities analyst Jang Moon-jun.

"GS E&C's debt ratio was 221.5 percent as of the end of the third quarter, so its participation in a mega deal will be burdensome for the company," he said.

"Doubts remain in place over whether GS E&C will be able to generate meaningful synergy between a construction business and a construction machinery manufacturer," the analyst said. "Our view is that short-term investment sentiment in GS E&C will be tarnished due to the participation in the deal."

"But we still have to wait and see how the race unfolds, as GS' cash power remains strong," the analyst said.

Despite the negative outlook, GS E&C will be able to diversify its business portfolio into the machinery sector at a time when its construction and plant-building business account for 90 percent of its total sales.