Much attention is being paid to the possibility of a merger between Hyundai Steel and Hyundai Hysco. Although the former has denied the possibility several times, stock market insiders are suggesting possible scenarios concerning cross shareholding in the Hyundai Motor Group and the synergy effects that are expected to result from the merger.
According to stock firms, Hyundai Steel and Hyundai Hysco are expected to merge to finalize the succession of the group and improve the financial structure and profitability of the subsidiaries. Once the two are merged, major shareholders like Hyundai Motor Company, Kia Motors, and group Chairman Chung Mong-koo will have a combined shareholder ratio of 41.2% (estimated by KDB Daewoo Securities), and thus they would have no problem at all with corporate governance. This has to do with the succession of the group.
Allowing for the complex cross shareholding structure in the Hyundai Motor Group and the low share ratio of Vice Chairman Chung Eui-sun, the group has to go through some share exchange processes. It is in this context that the merger is required.
“If the two companies are combined, the chairman’s shares in the new corporation, which are estimated at 11.6% with a current value of 1.2 trillion won [US$1.12 billion], and the Hyundai Mobis shares owned by Hyundai Steel, estimated at 5.66% and 1.5 trillion won [US$1.4 billion], are predicted to be swapped,” said KDB Daewoo Securities research analyst Jeon Seung-hoon. He added, “Then, the merger can meet its goal of improving the cross shareholding structure and offering more Hyundai Mobis shares to major shareholders.”
Advantages for Investment Redemption
In the meantime, Hyundai Motor Group needs to redeem its investment, too. The group has spent 9.5 trillion won (US$8.86 billion) on building the three furnaces of Hyundai Steel and invested approximately one trillion won (nine hundred thirty-three million dollars) in facility expansions of Hyundai Hysco. Most of the profits, however, are being generated by Hyundai Hysco. Therefore, the merger is inevitable for a better financial structure.
“The expenditures are expected to be increased by about 80 billion won [US$74.6 million] from the first quarter of next year due to the completion of the three furnaces and the investment in the special steel business, but more than 130 billion won [US$121 million] is required for cash flow,” Hyundai Securities analyst Choi Moon-seon explained. He continued by saying, “Hyundai Hysco has generated approximately 150 billion won in extra cash each quarter, which implies it is very appealing for Hyundai Steel.”
At present, Hyundai Steel’s debt-to-EBITDA is 6.0. This means that it would take six years for the company to repay its debts with 100% of its annual earnings with net interest reaching 360 billion won (US$336 million) a year. With the merger, though, the period is shortened to 1.1 years.
Stock Exchange is Likely Method
Hyundai Securities analyzed that, if the merger is decided, Hyundai Steel is likely to issue new shares and exchange them with those of Hyundai Hysco, because the former has borrowed more than 10 trillion won (US$9.4 billion) for furnace construction and is short on cash. Hyundai Mobis and Hyundai Autonet followed the same method in 2009, too.
“If this is the case, the decision should be made on or before late 2013, assuming that the merger will be made in the first quarter of 2014, when the cost burden is expected to begin to increase for Hyundai Steel.”
The stock exchange price estimated as of October 8 is 79,000 won (US$73.87) for Hyundai Steel and 44,200 won (US$41.33) for Hyundai Hysco. The exchange ratio is 1:0.5546. Investors are also interested in how the 7.99% Hyundai Hysco shares owned by JFE Steel will be sold in the case of a merger with a Japanese furnace company.