Buyout vs. Buyout
The Shinsegae Group, a national retail giant, will fight with the Kumho Asiana Group to buy a controlling stake of Kumho Industrial. If successful, this move will be a major power shift in the Korean financial world.
Market analysts said that Kumho Asiana Chairman Park Sam-koo is the strongest candidate for the deal, as he has the right of first refusal to buy a 50 percent stake plus one share in the builder by matching the price of the preferred bid. However, it seems to be quite difficult to presume the winner as Shinsegae Vice Chairman Chung Yong-jin gets involved with an aggressive investment strategy.
According to an annual report released in 2014, construction company Kumho Industrial stayed at number twenty among local builders with a 510 billion won (US$465 million) market price. But its true value lies in some of its profitable affiliates. Kumho Industrial is a major shareholder of Asiana Airlines, holding a 30.08 percent stake in the nation’s second largest air carrier. Asiana Airlines also has controlling stakes in local low-cost carrier Air Busan Co. and three other affiliates through the complex web of cross-shareholding. One of them is Kumho Terminal, which operates Express Bus Terminals across the country including Gwangju Express Bus Terminal. In Gwangju, Shinsegae has built a department store on the ground floor of a Kumho terminal. Kumho Terminal received an additional 500 billion won (US$456 million) in 2013 for a 20-year lease of the space by Shinsegae, an additional reason why Shinsegae has a strong interest in this deal.
Due to the premium prize of control over Asiana Airlines, the sales process is heating up the M&A market. Industry analysts expect that the final acquisition price might end up between 800 billion won (US$730 million) and 1 trillion won (US$913 million), much higher than its market price.
Kumho Industrial, the de facto holdng company of Kumho Asiana Group, has been mounting up debt. Kumho Asiana Group, its parent company, had also been struggling with chronic debt after a deal for Daewoo Engineering & Construction in 2006. The purchase was mostly funded by a group of financial investors, including KDB.
0n Feb, 25th, the final day to submit a letter of intent, Korea Development Bank, Kumho Industrial’s main creditor, reported that multiple companies participated in the sales process, but did not disclose the applicants' information.
Sources suggested that among financial companies, five local private equity funds (PEFs) have made bids, including IBK Securities-Keistone Partners, Jabez Partners Co., MBK Partners, IMM Private Equity, and Mirae Asset PEF. All five sent their Letters of Intent (LOIs) to the Korea Development Bank (KDB) and Credit Suisse, which are managing the sale of the 57.5 percent stake owned by KDB and other creditors.
Hoban Construction Co., a mid-sized builder ranked 15th as of 2014, also entered a bid. It currently owns a 4.95 percent stake in Kumho Industrial and reportedly has up to 300 billion won (US$274 million) in capital that it could use for a stake purchase.
Among prospective buyers, Shinsegae was the only one of the major companies that had been reaching out to this competition that submitted a LOI. It seems that Shinsegae might have weighed the pros of acquiring the Kumho Asiana Group package to create synergy effects with its duty-free shops. Other competitors like Lotte, however, can also take steps into this battlefield without submitting a letter.
Park Chan-goo, chairman of Kumho Petrochemical Co., Ltd. (KKPC), who has been in legal disputes with his old brother Park Sam-goo, did not eliminate the possibility of this acquisition.
With the entry of powerful competitors, 70-year-old Chairman Park could have been pressured. He is known to only have about 150 billion won (US$137 million) in funds to use. To cope with harsh challengers he would have to look for the right partners to raise enough available funds like strategic investors. Chairman Park is desperate to avoid seeing his group inevitably break apart.
On the other hand, KDB's plan initially omits the preliminary bidding procedures to finalize the sale quickly. KDB said it will select those companies eligible to bid early next month before inviting offers. And, in April, it will select a preferred bidder after preliminary due diligence against eligible bidders.