Daewoo Electronics on the block again

Daewoo Electronics is put up for sale a second time as the Videocon-Ripplewood bid fails, highlighting some of the risks in the M&A advisory business.
Creditors of Daewoo Electronics, who own a controlling interest in the Korean company, are once again looking for a buyer for the business. The lending group failed to close a deal with the Videocon-Ripplewood consortium which won the earlier round of bidding in October 2006, with an offer in the range of $750 million.

Neither the buy- or sell-side have clarified exactly why the winning consortium will not be moving forward with its bid, although, at various stages over the last year, information that the discussions were not progressing smoothly has been released.

Videocon is a leading Indian consumer electronics player. It bid with Ripplewood, a US private equity firm with a focus on buyouts. The deal followed a spate of announcements from Indian companies about successful offshore acquisitions and, at the time, was touted as another example of the global ambitions of Indian companies. Daewoo Electronics manufactures televisions, DVD players and other consumer durables with manufacturing facilities in Korea, as well as elsewhere in the world.

The deal started to hit obstacles after the buyers completed due diligence. Expectations were out of line with what the asset was worth and creditors were not prepared to make the significant concessions necessary to progress discussions, say some sources close to the deal. Specifically, the quality of unsold inventory and some receivables from affiliated companies are said to have adversely affected working capital assumptions.

Further, the existing lenders did not want to continue to extend credit on terms attractive to the buying consortium. This is unusual under the circumstances, say sources, as lenders have the most to gain û and conversely lose û from the asset being sold to someone who should start to deliver results.

The Videocon-Ripplewood consortium was advised on its bid by Citi and UBS. Neither bank had any comment on the current situation.

Daewoo ElectronicsÆ creditors are inviting bids until mid-December and are expected to announce a winner early next year. Woori Investment & Securities and Samil PricewaterhouseCoopers continue as advisers to the sale. It is not clear whether ABN AMRO, who was a joint adviser with Woori and PwC in the original deal, will have a role this time round.

Market conditions both for raising financing and, in general, for consumer electronics sales are probably more difficult now than they were in 2006, leading some observers to suggest the asset may not command the same interest now that it did earlier. In 2006, a number of private equity firms as well as strategic investors like ChinaÆs Haier group were said to be interested in the business.

The Daewoo Electronics sale brings into stark relief one of the dilemmas that investment banks face on M&A deals.

Traditionally, banks have preferred sell-side mandates as these have higher certainty of closure. But bankers have commented that sell-side mandates across the Asia-Pacific region, especially those awarded by governments or creditors, are increasingly being awarded at fee levels which make them uneconomic for the advisers.

In some instances, advisers get the client to agree to a success fee ôescalatorö. In this structure, the client and adviser will agree a fair value for the asset, the base price, based on a discounted cash flow analysis, comparable transactions and other relevant factors. The investment bank will earn a base fee for achieving the base price and a higher fee for exceeding the base price.

But fees are not the only variable, as the Daewoo case, and even the sale of Korea Exchange Bank, illustrate. Advisers can often be landed with sell-side mandates for assets which get stalled due to political or other reasons which are completely outside their control.

As only one bank - or in case of a joint mandate, two or three banks - will win the sell-side business, other investment banks represent interested bidders on the buy-side. Investment banks will try to gauge the probability of success and choose a client who is likely to emerge as the highest bidder.

In the current environment, it is not always easy to predict who will be the most aggressive bidder. To many observers, the fact that Korea's Doosan emerged as the winner for Ingersoll RandÆs Bobcat division in the US, was a surprising outcome as it suggested a mindset change in the strategy of Korean companies; companies that have hitherto not pursued large cross-border outbound deals in Western markets. Similarly, a number of Taiwanese technology companies that may not have seemed like the most obvious acquirers have recently emerged as winners in US auctions.

In some cases, financial sponsors have outbid strategic bidders, for example in the recent auction of Arysta in Japan. Winning bidder Permira, EuropeÆs largest buyout fund, trumped bids from an Indian and Australian strategic bidder. This could be because the longer forecast horizon of the strategic bidders was offset by a lower cost of capital and more aggressive growth assumptions by the private equity firm, comment some bankers.

On buy-side mandates, clients are often loathe to agree a fee structure which links the bid price in a linear manner to the fees paid - this can create a perceived non-alignment of interest between the adviser and the buyer as the buyer will always like to win the asset at the lowest possible price. To some extent, this situation is mitigated when the advising bank is also arranging the finance, hence one reason banks willing to lend finance to M&A deals are winning more buy-side business from both strategic investors and sponsors. The adviser will be sensitive to whether or not the deal can be financed.

Despite the credit crisis haunting global markets, and the adverse impact this has had on US deals, 2007 has been a good year for M&A in the Asia-Pacific. Companies have started to spread their wings and explore acquisitions of either strategic or financial stakes in assets across target markets. Investment banks in the region may well be faced with shrinking fees on some transactions, but the good news is the overall fee pool seems set to swell.
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