Grinding to Halt
The sale of Kumho Tire led by the Korea Development Bank (KDB) has virtually ground to a standstill in seven months after Chinese tire maker Doublestar was selected as a preferred bidder in January this year.
According to investment banking industry sources on August 17, Doublestar has recently demanded the KDB cut the bid price for its controlling stake in Kumho Tire worth 955 billion won (US$838.09 million) by 10 percent. The KDB should accept the demand in order to sell the company to Doublestar. In this case, however, key terms and conditions of the current sales and purchase agreement (SPA) signed between the two companies will be nullified. In short, the sale of Kumho Tire will practically go back to square one again.
If the creditors accept Doublestar's demand to cut the SPA estimated price of 955 billion won (US$838.09 million) by 10 percent, it would allow Chairman Park Sam-koo of Kumho Asiana Group, parent of Kumho Tire, to exercise his right to buy back the tiremaker. When Chairman Park bid more than 859.5 billion won (US$754.28 million) for the company, he can become a new owner.
The KDB has not decided yet whether to enable him to form a consortium. However, many say that creditors have no reason to prevent Chairman Park from exercising his right of first refusal any more as the sale process of Kumho Tire should start from the beginning again. Since there are still some at the KDB sticking to its previous stance that the right of first refusal is granted to Chairman Park alone and not the consortium, creditors will face a bumpy ride until they come to final conclusion.
Some say that the sale of Kumho Tire to Doublestar was a great strain from the very beginning. Politicians strongly opposed to the idea, raising concerns that China’s Doublestar can shut down the tiremaker’s plant in Gwangju and drain skills after aacquiring the company. However, the KDB has pushed ahead with the sale and tried to start the sale process again by changing the SPA in the end, rather than declaring the failure in bidding, after the sale has become impossible.
In fact, the KDB pushed ahead with its plan to sell Kumho Tire to Doublestar, saying it can get some 1 trillion won (US$876.04 million) from the sale. However, creditors, including the KDB, can earn only 600 billion won (US$525.16 million) from the sale due to the resale through the termination of the SPA. It costs about the same as Park’s former bid. So, the KDB has no justification for the enforcement of the sale plan now.
Under the SPA, the estimated sale price of Kumho Tire is 955 billion won (US$838.09 million). However, creditors has decided to pay 0.5 percent of its sales as a brand usage fee to Kumho Asiana Group for 20 years. In this case, the KDB will have to pay 270 billion won (US$236.26 million) for Doublestar and will receive 95 billion won (US$83.1 million) less from the Chinese firm when cutting the price by 10 percent. It means that creditors, including the KDB, needs to sell Kumho Tire at a loss of 365 billion won (US$319.22 million).
In addition, the KDB cannot escape from the criticism that the bank has destroyed the leading domestic tiremaker as it pushed ahead with the sale. In fact, Kumho Tire suffered a considerable tangible and intangible loss through the sale process. As the rumor that Kumho Tire, which is the 14th largest tiremaker in the world, will be sold to Doublestar, which ranks 34th, has spread, the company’s major customers cut their new orders and decided to wait and see how it goes. Since Kumho Tire has started operation of its Georgia plant with a production capacity of 4 million units, which was completed last year, the company needed to secure new customers. However, the company has failed to secure new customers and has difficulties to maintain the orders from its existing customers. Kumho Tire’s customers raised concerns that they will not be able to use “Kumho” brand after placing new orders. Moreover, they are worried that the quality of products can be degraded.