KoreaToday Hyundai Group shrugs off debt concerns
Stage set for the conglomerate to take over Hyundai Engineering & Construction
By Kang Seung-woo
Hyundai Group, led by Hyun Jung-eun, the widow of Chung Mong-hun, one of the founder’s sons, is just about ready to acquire Hyundai Engineering and Construction (HEC).
Korea’s leading construction firm, which was the starting point of the business empire before a three-way split, has been under creditors’ control.
To Hyundai Group, which is now composed of Hyundai Merchant Marine, Hyundai Securities, Hyundai Asan, acquiring the construction firm is both a sentimental issue as well as a pivotal business move.
By reclaiming it, Hyun will be able to do what her late husband couldn’t ― set the stage for a new business model for the conglomerate that is in dire need of one.
In August 2001, Hyundai Group was split into three ― Hyundai Motor, Hyundai Heavy Industries and one which retained the name, Hyundai Group ― while the remaining businesses were taken over by creditors.
Since then, Hyundai Group has kept an eye on the firm. Officials of the group say that, under its control, the construction firm could maximize synergy.
“Hyundai Group and Hyundai Engineering and Construction together can make a great deal of cooperation,” an official said. “We have plans to make Hyundai Construction even greater.”
HEC, set up in 1947 by the late Chung Ju-yung, the founder of the group, is the oldest builder in Korea and maintains the billing as the nation’s top builder with its annual orders amounting to trillions of won.
The constructor became the first player in the industry to report more than 9 trillion won in revenue last year, after chalking up 9.28 trillion won in sales and reaching 446.6 billion won in net profit.
HEC, which earned a record 331.1 billion won in net profit in the first half of 2010, is forecast to reach 13.55 trillion won in sales by 2012, according to Shinyoung Securities.
The creditors have been on the lookout for a new owner after its main creditor Korea Exchange Bank (KEB) put it on sale in April 2006 when HEC completed its debt workout program. However, there has been little progress until recently.
Now KEB and other credit banks announced their plan to sell their 35 percent stake in the company late June.
KEB picked Merrill Lynch and a domestic consortium of Korea Development Bank (KDB)’s M&A unit and Woori Investment & Securities to manage the sale of HEC.
Hyundai Group believes that acquisition of HEC will play a key role for the group’s future. That need was well illustrated by Chairwoman Hyun’s show of determination.
“Hyundai Construction is a promising new growth engine that we cannot give up for the future of the group,” its Chairwoman Hyun Jung-eun said in her New Year’s speech. “We have to prepare for the acquisition of Hyundai Engineering and Construction when the sale of the builder starts.”
Hyundai Construction has a great deal of expertise in building social overhead capital (SOC) or infrastructure, such railroad, airport and power plants.
Hyundai Group sees it as being pivotal to its long-term growth engine ― North Korea. Although its North Korea operations such as tourism to Mt. Geumgang and the border town of Gaeseong are in trouble now, the conglomerate still sees a business potential north of the border, which is the reason why it is still holding on to Hyundai Asan, its arm for North Korean business.
Hyundai’s theory goes that, if North Korea opens up, it would mean a great deal of infrastructure will be newly constructed or refurbished. This encourages Hyun to go after the firm at almost any cost.
There will also be a ripple effect from the acquisition.
First, Hyundai Securities is expected to strengthen business and raise profit, taking advantage of HEC’s network, while HEC will be able to learn advanced financial techniques and raise funds, helped by the securities firm.
HEC will be able to benefit from transporting material behind the logistics services by Hyundai Merchant and Marine and Hyundai Logiem.
More than anything else, the acquisition will help Hyundai Group expand its business portfolio, which is overly focused on Hyundai Merchant Marine, its chief cash cow. It is widely expected that the group will aggressively join the bidding race, highlighting its strong points such as its early bid.
There is also more than what meets the eye.
Hyun wants to have a claim as the legitimate successor of the founder. Now, all the other spinoffs lay claim to that title.
That is connected also to a business element that is, above all, the most serious among others ― Hyun’s continued control of Hyundai Merchant Marine.
HEC is the main shareholder of Hyundai Merchant Marine, the de-facto holding firm of Hyundai Group.
The builder owns more than 8 percent of Hyundai Merchant Marine.
Along with Hyundai Group, Hyundai-Kia Automotive Group, whose flagship unit is the nation’s No. 1 vehicle maker Hyundai Motor, is joining the bid, with the aim to beef up its business portfolio, which also includes Hyundai Steel.
Solid numbers for Hyundai
Hyundai has refused to accept a debt restructuring program imposed by its creditors, arguing that their financial assessment didn’t well reflect the real condition it is in.
To support its claim, the company has put up impressive numbers for this year.
As a matter of fact, the company recorded operating profit of 11.6 billion won in the first quarter of the year, followed by 156.1 billion won in the second quarter.
Analysts forecast that the company will report up to 300 billion won in the third-quarter operating profit, beating its initial prediction of 335.8 billion won for the whole 2010.
Hyundai was selected in May as one of nine financially distressed conglomerates, which would subject it to rigorous debt rescheduling to improve the financial soundness of the large industrial firm, accusing the creditors for “misunderstanding” its corporate value and business model.
Hyundai claims that its flagship Hyundai Merchant and Marine operates on a business model unique to other industries so that applying the typical below-200 percent debt to equity ratio is inappropriate.
Creditors angered by Hyundai’s consecutive refusal have frozen new loans to the group since last month.
“The evaluation was based on last year’s records and did not reflect the improvements Hyundai Merchant Marine made in the second quarter of this year,” an official of Hyundai Group said.
To press ahead with its refusal, Hyundai repaid 35 billion won loans by Hyundai Elevator to KEB on July 30, five months ahead of the expiration of maturing loans, after it made a 40 billion won payment by Hyundai Merchant and Marine in June to reduce its outstanding loan to 90 billion won.
The remaining debt amounts to 90 billion won ― 70 billion won in syndicated loans for the shipping industry and 20 billion won in foreign-currency loans.