A Preferential Deal?
Hoban Construction Co. was chosen as a preferred bidder for the stake in Daewoo Engineering & Construction Co. on January 23 on the condition of providing interest and security to the Korea Development Bank (KDB) when separately acquiring the stake. Under the terms, the company will acquire 40 out of the 50.75 percent stake for cash first and step back when a third party tries to take over the remaining 10.75 percent at a better price while guaranteeing a certain amount for the stake.
After some politicians raised a question over a special favor for the deal, Hoban Construction said it presented conditions that are as friendly as possible in terms of market standards. Since the KDB seeks to close the deal this time, the two sides have reached an agreement.
According to investment banking (IB) industry sources on the 23rd, Hoban Construction has made a solo bid on the 19th and announced that it would buy the 50.75 percent stake in Daewoo E&C for 1.6 trillion won (US$1.49 billion) – 7,700 won (US$7.15) per share. It is about 30 percent higher than 5,960 won (US$5.54) of the closing price of Daewoo E&C on the 19th.
Hoban Construction will immediately purchase 40 percent of the total stake for cash and acquire the remaining 10.75 percent stake three years later but guarantee more than 7,700 won (US$7.15) per share to the KDB even if the share price falls below 7,700 won (US$7.15). The fall in share prices is highly likely to be guaranteed for loan interests. To this end, the company will provide its affiilates’ cashable assets, such as deposits and shares, as collateral.
In addition, the KDB can sell 10.75 percent shares when a third party wants to buy the stake three years later. An official from the sale said, “For the KDB, it is a more favorable condition than selling shares at a sitting.” When a buyer purchases a certain amount of shares first and remaining shares later and guarantees a certain amount for remaining shares in a general process of a split sale, a buyer and a seller usually share profits from the rise in share prices. Under the terms proposed by Hoban Construction, however, the KDB can prevent losses from the drop in share prices but take all the profits from increasing share prices.
However, politicians, mostly from the opposition party, criticized that it is a preferential deal. Kim Sung-tae, the floor leader of the main opposition Liberty Korea Party, said, “The market says that a small shrimp tries to swallow a whale. It only deepens suspicion about the connection between the current government and Hoban Construction.” In this regard, Hoban construction said its assets grew to 7 trillion won (US$.65 billion) last year that is big enough to be categorized into a conglomerate group by the Fair Trade Commission (FTC) and it is not appropriate to compare with a shrimp and a whale considering its high operating profits.
Hoban Construction posted 655.5 billion won (US$610.9 million) in net profit as of 2016, achieving better performance than Daewoo E&C with 470 billion won (US$438.02 million) of losses. The company’s cashable assets reached 1.3 trillion won (US$1.21 billion) and debt ratio came to some 50 percent as of the end of 2017. It shows that Hoban Construction has a more stable financial structure than Daewoo E&C which had 850 billion won (US$792.17 million) of cashable assets and 284 percent of debt ratio as of the third quarter in 2017.