The Korea Development Bank (KDB), the main creditor of Kumho Tire, is seeking to attract outside capital but whether the Ministry of Trade, Industry and Energy (MOTIE) and the Defense Acquisition Program Administration (DAPA) allow a foreign company to become the largest shareholder will be a variable. In particular, the KDB is ready to put Kumho Tire into receivership if the labor union doesn’t agree with its self-rescue plan by the end of this month. Therefore, serious challenges still remain to complete the sale.
According to investment banking industry sources on Feb. 22, the KDB is renegotiating with China’s Qingdao Doublestar to hand over the management of Kumho Tire through a capital increase through third-party allocation. However, Kumho Tire is a major defense company that supplies aircraft tires, including F-16 fighter jet and T-50 supersonic trainer jet. Accordingly, a foreign company needs to receive approval from the MOTIE under the Foreign Investment Promotion Act when it tries to secure the management. The KDB unofficially asked the DAPA if it is possible to sell the management of Kumho Tire to a foreign firm and the DAPA internally started examination.
The sales of defense division at Kumho Tire accounts for a mere 0.2 percent of the total sales but the DAPA will not be able to easily make a decision because of a strong public opposition to the sale of Kumho Tire to a Chinese firm, ignited by China’s retaliation over the deployment of the U.S. Terminal High Altitude Area Defense (THAAD) missile system on the Korean Peninsula, according to market watchers. In addition, it will be the first case of a domestic defense company with the largest foreign shareholder if the DAPA approves the sale of Kumho Tire’s defense unit to a foreign firm.
Doublestar offered to guarantee full employment of Kumho Tire for three years after the acquisition. However, a possible controversy over foreign firms’ take-the-money-and-run attitude, such as General Motors’ decision last week to shut down a factory in Gunsan, southwest Korea, can be another variable.
The KDB was planning to hold a shareholder meeting on the 26th to discuss its plan to sell Kumho Tire to Doublestar but suddenly cancelled it largely due to such variable.
The creditors decided to roll over Kumho Tire's debts by one year on condition last month and withdraw the grace period if they fail to sign a memorandum of understanding (MOU) on management normalization with Kumho Tire by the 26th. They asked Kumho Tire to get a self-rescue plan agreed with the labor union for the precondition to the MOU. However, the creditors cannot sign the MOU with Kumho Tire as the company haven’t reached an agreement with its labor union. In short, the creditors will take Kumho Tire into bankruptcy when they don’t sign the MOU with Kumho Tire and Kumho Tire fail to replay the debts which are matured by the 26th. Furthermore, the management and labor union need to reach an agreement by the 23rd because the union members needs to vote on the plan.
Kumho Tire’ management asked the labor union to cut costs by 95.8 billion won (US$88.76 million) out of 148.3 billion won (US$137.4 million) required to normalize the management and whether the labor union accepts the proposal will be a decisive factor for the sale of Kumho Tire. A senior official from the creditors said, “The agreement between Kumho Tire’s management and labor union is the requisite in terms of both normalization through the sale and extension of bond maturity.”