The Only Option?
The Kumho Tire creditors including the Korea Development Bank (KDB) announced on March 2 that they would conduct a third-party capital increase of 646.3 billion won (US$581 million), 5,000 won (US$4.5) per share, with Doublestar Tire. If it turns out to be successful, Doublestar Tire becomes the largest shareholder in Kumho Tire with a shareholding of 45% and the ratio of shares owned by the creditors falls from 42% to 23.1%.
“Doublestar Tire is the best option in view of a fast restoration of Kumho Tire and its corporation in China and the minimization of our losses,” the creditors explained, adding, “We decided to initiate investment negotiations in that Doublestar Tire’s vision and action plans are specific and feasible enough.”
The contract money is 32.3 billion won (US$29 million), 5% of the total investment, and the creditors and Doublestar Tire are planning to complete the negotiations within the first half of this year. When it comes to investment conditions, Doublestar Tire maintains the employment of Kumho Tire employees for at least three years and sale of shares is prohibited for three and five years for Doublestar Tire and the creditors, respectively. In addition, Doublestar Tire should maintain its position as the largest shareholder for at least five years or until the creditors sell their shares. Issues related to bond extension, trademark use, government authorization regarding the defense industry, and so on are scheduled to be handled prior to investment.
According to the creditors, the investment from Doublestar Tire is expected to lead to production network and capacity expansion and technology sharing, and then Kumho Tire will become the 10th-largest tire manufacturer in the world in terms of sales. “Doublestar Tire’s 4,500 network points in China can be of great help for Kumho Tire China’s restoration and Kumho Tire’s liquidity conditions can be improved based on lending extension by local financial organizations,” the creditors went on to say, adding, “Kumho Tire’s going concern value is approximately 460 billion won (US$414 million) whereas its liquidation value is one trillion won (US$900 million).”
Creditors to Put Pressure on Union Members
In the meantime, Kumho Tire is currently undergoing a severe liquidity crisis with no more financial support from the creditors. The creditors are planning to put pressure on Kumho Tire union members opposed to the sale by means of letter of credit reduction and so on. This is to clarify that the company’s recovery can be thwarted if the members continue to be opposed to the sale, the members’ proposal for management by the creditors is hardly feasible, and receivership will follow in the worst-case scenario. The creditors are going to keep persuading the members until the end of this month.
Some of the members, in fact, are already staging a sit-in. If they remain opposed to the creditors’ plan, Kumho Tires’ liquidity will run out and the company will go into receivership. Then, rigorous court-led restructuring will follow and a large number of employees will have to leave their company with empty hands. The regional economy can take a direct hit and the negative impact is estimated at trillions of won.
Under the circumstances, complaints are growing even among Kumho Tire employees themselves. “It is none other than union members that are choking the company and non-unionized workers as well as themselves and the union should be gotten rid of,” an anonymous employee posted on a bulletin board.