Huge M&A Loss

The Hyundai Group headquarters building in Yulgok-ro, Jongno-gu, Seoul.
The Hyundai Group headquarters building in Yulgok-ro, Jongno-gu, Seoul.

 

Decision-making errors are widely mentioned as one of the biggest reasons for the Hyundai Group’s drop in credit rating to a junk level. It is said that the group lost hundreds of billions of won amid the unfavorable financial situation following the recent downturn in the global shipping industry, by taking over the Banyan Tree Hotel, a savings bank, and other questionable companies.

Securities market experts are focusing on the M&A history of the Hyundai Group surrounding its credit rating fall. Korea Investors Service demoted the credit ratings of Hyundai Merchant Marine, Hyundai Elevator, and Hyundai Logistics by three notches from BBB+ to BB+ on March 14.

The Hyundai Group acquired the Daeyeong Savings Bank and the Banyan Tree Spa & Resort in late 2011 and mid-2012, respectively. The cost of the acquisition was approximately 96 billion won (US$89.8 million) and 160 billion won (US$149.6 million) each. In fact, the absolute amount is not that large. Rather, the poor performance of the subsidiaries is the main culprit in the decline of the credit rating. Still, it is also problematic that the group rushed to the M&A market with its financial structure deteriorating at a rapid pace.

The group has recently put both the hotel and the savings bank back on the market in an effort to improve the financial structure, less than two years from the takeover. The consensus is that it will have to bear sizable losses in th sales. It is planning to dispose of Hyundai Securities and the renamed Hyundai Savings Bank as a single package. The price has yet to be determined, but is expected to be much lower than its 266 billion won (US$248.7 million) investment in the savings bank.

The acquisition of the savings bank was based on the financial resources of Hyundai Securities, and thus has not dealt a staggering blow to the financial conditions of the group as a whole. What defies understanding is the takeover of the Banyan Tree Hotel.

The group purchased the hotel in June 2012 at a price of 165 billion won (US$154.3 million). It procured 90 billion won (US$84.2 million) from Hyundai Merchant Marine, Hyundai Elevator, and Hyundai Securities while borrowing the rest from banks. The year of 2012 was when its major subsidiaries were suffering from plunging performances. Hyundai Merchant Marine’s debt ratio skyrocketed from 396 percent to 799.1 percent at that time, resulting in current operating losses of 509.6 billion won (US$476.5 million) and a current net loss of 988.6 billion won (US$924 million).

Likewise, Hyundai Elevator posted a current net loss of 41.4 billion won (US$38.7 million) during the same period, although the operating profits reached 49.3 billion won (US$46.1 million) due to the derivatives losses attributable to the decline in the stock price of Hyundai Merchant Marine and the loss on valuation of investment using the equity method of accounting. The company had recorded losses of 137.6 billion won (US$128.7 million) in the previous year, too. Hyundai Securities’ current net income was halved from the preceding year as well.

Even some watchers said that men behind the scene were involved in the M&A process that brought little actual benefit. The labor union of Hyundai Securities went on strike, calling this issue into question.

Now, the Hyundai Group is planning to sell not only the hotel and the savings bank but also the stock firm, which was a part of the bank acquisition. Hyundai Savings Bank is likely to be sold at a low price due to its sluggish performance. The Banyan Tree Hotel has too much debt, and is likely to contribute little to the cash flow conditions of the group. In short, both of the two M&A cases have turned out to be costly blunders.

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