Kumho Asiana Group is facing difficulties in selling off its stake in struggling Asiana Airlines Inc. Domestic business groups that were considered potential buyers, such as SK and Hanwha, all announced that they are not considering acquiring Asiana Airlines, raising the possibility that the stake sale process could be prolonged. An investment banking (IB) industry insider said, “Companies are extremely reluctant to be mentioned as potential buyers. There is a possibility of no effective candidate emerging until a public sale notice is announced in July.”
Various unfavorable factors undermine Asiana Airlines’ charm as an acquisition target. One such factor is the worsening performance of Asiana Airlines’ subsidiaries, which lowers the parent company’s corporate value.
The performance of Asiana Airlines and its key subsidiaries worsened sharply in the first quarter of this year. Asiana Airlines posted 7.20 billion won (US$6.05 million) in operating profit on a consolidated basis, one 10th the level a year ago. The airliner alone posted 11.80 billion won (US$9.92 million) in operating loss when the profits of its major subsidiaries are excluded. Its profit fell nearly 50 billion won (US$42.02 million) from 37.70 billion won (US$31.68 million) a year earlier.
Asiana Airlines’ subsidiaries are also struggling with poor performance. Asiana IDT Inc., the information technology service unit of Asiana Airlines, saw its sales increase 13.1 percent on year to 60.50 billion won (US$50.84 million), but its net profit halved from 3.70 billion won (US$3.11 million) to 1.90 billion won (US$1.60 million). Air Busan Co., a low-cost carrier (LCC) based in Busan, posted 174 billion won (US$146.22 million) in sales in the first quarter, a similar level to a year ago, but its operating profit of 5.50 billion won (US$4.62 million) was one third of that recorded last year. In particular, the LCC logged a net profit of 1.90 billion won (US$1.60 million), down 90 percent from 13.60 billion won (US$11.43 million) a year ago.
The situation is very much the same with Asiana Saver Co., a computer reservation system operator in which Asiana Airlines has an 80 percent stake, and Asiana Airport Co., a wholly owned subsidiary of Asiana Airlines. The parent company’s poor performance in core business adversely affected its subsidiaries. Asiana Saver’s total profit decreased from 2.30 billion won (US$1.93 million) to 631.11 million won (US$530,345). Asiana Airport turned to a loss of 1.10 billion won (US$924,370) from a profit of 1.60 billion won (US$1.34 million) last year. Kumho Resort Co. also had a bigger quarterly loss of 4 billion won (US$3.36 million).
Only Air Seoul, another LCC of Asiana Airlines, and Asiana Staff Service Inc. showed improvement in performance compared to a year ago. Air Seoul’s all-inclusive profit came to 8.10 billion won (US$6.81 million), up nearly five times from 1.70 billion won (US$1.43 million) a year earlier. However, there are differing views on whether Air Seoul will be able to come up with a sustainable profit model as a late starter in the LCC industry. Asiana Staff Service posted only about 200 million won (US$168,067) in profit.
Industry analysts say that the performance deterioration of Asiana Airlines and its subsidiaries is not a one-time thing. Uncertainty is growing in the business environment of the airline industry, ranging from high exchange rates to high oil prices. Asiana Airlines has a higher proportion of flights to China than other airliners. It is not be easy to sharply increase profits on China routes as the trade dispute between the United States and China continues and LCCs challenge full-service carriers. The market consensus forecast that Asiana Airlines’ operating profit will stand at 16.10 billion won (US$13.53 million) in the second quarter, down 57.6 percent from the same period a year earlier, according to market researcher FnGuide.
Asiana Airlines’ consolidated debt came to 9.70 trillion won (US$8.15 billion) in the first quarter of this year, recording a debt rate of 895 percent. The airliner needs to make a profit to pay off debt but it is not easy to increase its gains. The firm’s debt rate is expected to fall to 600 percent in the first half of the year as its creditors will provide financial support as announced in April. However, Asiana Airlines needs 2 trillion won (US$1.68 billion) to 3 trillion won (US$2.52 billion) right now considering its financial health and risk factors.
Financial authorities said, “The bidding fever will rise after a public sale notice is posted in July.” However, it is a “closed bidding” in which private equity funds (PEFs) that have recently emerged as a big player in competitive tenders cannot participate. As a result, strategic investors will determine the success or failure of the stake sale.
In particular, Korea Development Bank (KDB), which has acquired 500 billion won (US$420.17 million) worth of perpetual bonds issued by Asiana Airlines, would have to take over the company two years later if the ailing airliner is not sold. When the sale process becomes delayed, the bank will face a bigger risk.
IB industry insiders point out that KDB must thoroughly review Asiana’s accounting practices as the company’s management, including former chairman Park Sam-koo, is suspected of cooking its accounting books.
A case in point involves “Gate Gourmet Korea (GGK),” a company that caused the in-flight meal fiasco last year. Asiana Airlines said in an auditor report released on March 22 that it acquired a 39.94 percent stake in GGK for 29 billion won (US$24.37 million), which was 31.50 billion won (US$26.47 million) in book value. However, it changed the acquisition price to 46.60 billion won (US$39.16 million) in the modified audit report released four days later. Accordingly, the book amount also jumped from 31.50 billion won (US$26.47 million) to 49.20 billion won (US$41.34 million). This change spawned doubts about the accuracy of the figures. In addition, Asiana Airlines spent an additional 39.10 billion won (US$32.86 million) in the first quarter of this year to increase its stake in GGK by a mere 0.6 percent.
Controversy is still continuing over last year’s audit report which was revised three times. Asiana Airlines said it posted only 10.40 billion won (US$8.74 million) in net loss when it notified the convocation of a general shareholders’ meeting in early March. However, its net loss grew to 105.10 billion won (US$87.98 million) in the report which received a qualified opinion and then to 195.90 billion won (US$163.99 million) in the report which received an unqualified opinion. This was the decisive reason why Asiana Airlines was put up for sale but it is still unclear why the firm’s loss increased by nearly 20 times.
All this suggests the need for creditors to thoroughly conduct due diligence. A scrutiny of the company’s accounting books will be conducted after an acquisition candidate is selected. But the sale process could come to a stop if additional losses are detected in the process of due diligence. Since creditors, including KDB, injected public funds worth 1.60 trillion won (US$1.34 billion) into Asiana, they are obligated to check thoroughly whether there are more accounting fraud. An IB industry expert said, “The buyer of Asiana needs to buy both the old shares owned by Kumho Industrial Co. and new ones. If it has to put more money into it due to additional losses, it would give up. So creditors need to remove market distrust before posting a sale notice.”