Biggest Deal in H2
Daewoo Engineering & Construction, which is considered the biggest deal in the merger and acquisition (M&A) market in the second half of this year, will begin its sale process in earnest.
According to investment banking (IB) industry sources on July 10, the state-run Korea Development Bank (KDB) plans to pick multiple lead managers, including one domestic and one foreign firm, early next month at the latest to arrange the planned sale of “KDB Value Private Equity Fund 6” which holds a 50.75 percent stake in Daewoo E&C. To this end, the KDB sent a request for proposal to securities and accounting companies at home and abroad on the 7th in its bid to select lead managers.
When the bank chooses lead managers of the sale, it will talk with the lead managers and allow investors which submit a letter of intent (LOI) next month to conduct preliminary due diligence for two to three weeks. Once the bank selects a preferred bidder, it aims to sign a sales and purchase agreement (SPA) by the end of the year after conducting accurate due diligence for two to three months.
KDB is selling its private equity fund (PEF) holding of 50.75 percent stake in Daewoo E&C so the deal is subject to the Capital Market Act, instead of the National Contract Law. This is why it doesn’t require a number of bidders. The revised article also made the sale of Daewoo E&C easier. The KDB added an article at the board meeting in April that enables to sell an asset at a lower price than book value. In the Article 40, it specified that it should sell assets quickly at a market value considering methods of stock trading when it has accomplished the purpose of investment. The sale at a market value means that seller can sell its shares at a price corresponding to its current stock prices if it is a listed company.
Some IB industry watchers are paying attention to the move of domestic construction companies and private funds becuase overseas construction sectors are relatively sound. In addition, they are eyeing on the move of foreign capital such as China and Middle East. Some say that China State Construction Engineering Corp. (CSCEC), the largest state-run construction firm in China, joined the bidding to acquire Daewoo E&C.
The securities industry think that Daewoo E&C is attractive in terms of current stock prices. It expects that Daewoo E&C will make stable profits after the company reflected large losses in the fourth quarter of last year, raising the target stock prices.
After Daewoo E&C carried out the so-called “big bath” accounting practice last year by reflecting one-time potential losses to clean the balance sheet for the future, its performance has significantly improved from this year. The company posted 221.1 billion won (US$192.16 million) in operating profit in the first quarter, setting a new quarterly record. It is also expected to continuously show performance improvement until the first half of next year as its sales in the housing sector in the second quarter is rising and profits from completed construction is increasing. According to data provider FnGuide, the operating profits of Daewoo E&C in the second quarter are estimated at 198.4 billion won (US$172.43 million), up 87.7 percent from the second quarter last year. Daewoo E&C aims to generate 11.4 trillion won (US$9.91 billion) of sales and 700 billion won (US$608.43 million) of operating profits this year.
Daewoo E&C is a large construction firm that ranked fourth in terms of construction capability evaluation in 2016. It builds infrastructure at home and abroad, such as roads, railways and bridges, eco-friendly housing facilities and commercial buildings. In particular, Daewoo E&C has ranked top in the domestic housing market in terms of housing supply for seven years in a row since 2010. The company has also entered the global market early and carried out the road construction project in Ecuador in the late 1970s. Since then, it has been carrying out more than 300 construction projects in 40 countries around the world including Asia, Middle East, Africa and Europe.
Daewoo E&C has been developing new markets and business opportunities in the global market from last year. The company has re-entered the Indian market in 18 years, and won a US$480 million (550 billion won) deal to build a bridge across the Ganges River in Bihar, India, last year. Furthermore, it received the Meki-Zeway highway construction deal worth US$82 million (94 billion won) in Ethiopia, Africa. Daewoo E&C will also build commercial and office buildings, houses and schools to create a new city as big as two thirds of Yeouido in Hanoi, Vietnam. The Star Lake City project is worth US$2.1 billion (2.41 trillion won).
Daewoo E&C posted 10.99 trillion won (US$9.55 billion) in sales in 2016, surpassing the 10 trillion won-mark for the first time. However, the company reported operating losses of 503 billion won (US$437.2 million), as it removed potential losses in advance by applying the conservative accounting standard according to the accounting transparency improvement plan related to the production-to-order businesses, which was announced by the government authority last year.