No stampede seen for Daewoo Eng stake

Tight credit and a cloudy outlook for the construction industry may curb interest in the $2.6 billion sale of South Korea's No.3 builder Daewoo Engineering & Construction, and see control pass to a creditor. While cash-rich bidders such as steelmaker POSCO are watching the situation, private equity funds may heed government warnings against heavily leveraged buyouts, and focus on other auctions such as Hyundai Engineering. The main driver for a sale due to kick off this month is likely to be Kumho Asiana Group's own eagerness to offload Daewoo Engineering, which has a solid track record in residential construction and overseas projects. As part of its costly 2006 acquisition, Kumho has to buy back shares from financial investors who own a combined 39 percent in Daewoo Engineering, starting later this year, at more than twice the current market price.
A last resort could be to sell Daewoo to a private equity arm of its main creditor, Korea Development Bank (KDB), a move that may force Kumho to offer up collateral in the form of assets. "Kumho's main mistake when it bought Daewoo in 2006 was that it simply couldn't afford it," said Kang Seung-min, analyst at NH Investment & Securities. Kumho is expected to offer a 50 percent stake plus one share in Daewoo, reckoned to be worth about 3.2 trillion won ($2.6 billion), including a 30 percent premium. "It's a buyer's market, so the size of the stake on offer will be subject to what the buyer wants, which would be big enough to secure management," said Cho Joo-hyoung, an analyst at Hana Daetoo Securities.
Kumho Asiana, led by Kumho Petrochemical (011780.KS), owns 33 percent of Daewoo Engineering. Including financial investors' holdings, the combined stake was bought for around 6.4 trillion won in 2006, double the market value at the time.
Kumho paid the equivalent of 19 times EBITDA (earnings before interest, tax, depreciation and amortization), a price viewed as excessive even then, when money was easier to come by, and it has weighed on struggling Kumho since.
Sung Joo-young, a spokesman for KDB, which is handling the sale with Nomura Securities, said information packs outlining Daewoo's business would be sent out to potential bidders as early as next week. Nomura declined comment.
POSCO's CEO told reporters this month he was watching the Daewoo situation, and a decision on whether to bid would be made once the builder was officially up for sale.
Other potential bidders such as retail giant Lotte Group, GS Holdings, parent of GS Construction, and conglomerate Hyosung Group have publicly denied any interest. But analysts point to potential synergies from linking up with Daewoo.
South Korean media have also touted top U.S. engineering firms such as unlisted Bechtel and Parsons Brinkerhoff as possible bidders. A Bechtel representative declined to comment, while Parsons could not be reached.
Analysts say foreign buyers could be attracted by Daewoo's reputation as an efficient builder and its record in high-potential markets in the Middle East and Africa.
Some unprofitable overseas projects will be concluded this year, lightening the financial load, they said. However, differences in business focus and potential cultural conflicts could be deterrents. Shares in Daewoo have risen 65 percent this year, outpacing the broader market's 37 percent gain, but the stock is unlikely to get new momentum from the upcoming sale as few expect a buyer to launch a tender offer for minority shareholders. Chances remain high that a number of bidders will at least pitch for Daewoo, but with the government planning to finalize a sale this year, there may not be enough time to narrow price differences. That could leave KDB's own private equity fund, set up to support conglomerate restructurings, to walk away with Daewoo.
"If none of the bidders offer the right amount, chances are KDB's private equity fund will get Daewoo," said Heu Moon-wook, analyst at Samsung Securities.