KNOC makes successful grab for UK's Dana

The Korean state-owned oil company acquires a 64.26% stake in Dana Petroleum following a hostile bid and amid expectations of further overseas acquisitions by Korean firms.

Korea reached another milestone last week as its state-owned oil company won an aggressive bid for ownership of a UK oil explorer. Having already established a worldwide reputation for product and brand quality, Korean companies seem set for a more assertive role on the global stage as the country competes for natural resources and intellectual properties.

Korea National Oil Corporation (KNOC) said on Friday that it had gained control of Dana Petroleum, the Scottish oil exploration company, in a £1.87 billion ($2.9 billion) hostile takeover. KNOC received acceptance for its bid from shareholders representing 34.76% of Dana’s common equity, adding to the 29.5% stake it has already bought in the open market since its approach to the company on July 1. Its offer also included a bid for £141.5 million of Dana’s convertible bonds.

The company announced that the all-cash offer was now unconditional, and Dana's management finally advised shareholders to accept it. Dana shares rose five pence on Friday to £17.98.

KNOC offered to pay £18 a share on August 20, which equalled a 59% premium to the closing price on June 30. Dana’s board of directors initially rejected the offer, arguing that it undervalued the company by 18%. But, its claims failed to convince the majority of shareholders. Schroder Investment Management and BlackRock Investment Management, two of Dana’s biggest shareholders, publicly said in August that they backed the KNOC bid.

KNOC has now extended its offer to shareholders in control of the remaining 35.74% and said it intends to apply for a delisting of Dana’s stock from the London Stock Exchange if it obtains 75% of the shares.

Meanwhile, KNOC gave the go-ahead on September 20 for Dana’s £240 million purchase of Petro-Canada’s North Sea production hubs from Suncor Energy.

The success of the Dana bid seems to have vindicated KNOC’s aggressive stance, although the company and its adviser, Bank of America Merrill Lynch, have aroused some criticism.

“Inside Korean M&A circles there are concerns around the hostile nature of KNOC’s bid for Dana as investment bankers believe it might create suspicion and defensiveness when other Korean companies seek overseas assets,” noted one Seoul-based banker.

The transaction certainly boosts the M&A credentials of BoA Merrill in Korea.

Bank of America has been in Korea for 42 years. Following the merger with Merrill Lynch in late 2008, the combined platform is well positioned in advisory and capital markets given Bank of America’s prominence in the syndicated loan market and the strength of its balance sheet.

Korean demand for natural resources

John Kim, co-country head and head of investment banking at Goldman Sachs, points out that KNOC’s move indicates a trend towards outbound acquisitions by Korean firms.

“Korean companies are aggressively and strategically looking overseas for growth,” he said.

In August, KNOC said that it will spend up to $6 billion on acquisitions and projects this year in order to meet a government target to double production to 300,000 barrels of oil a day by 2012 – equivalent to about 10% of the country’s oil imports. KNOC has a $12 billion war-chest for acquisitions, according to sources close to the company.

The latest BMI (Business Monitor International) South Korea Oil and Gas Report forecasts that the country will account for 7.94% of Asia-Pacific regional oil demand by 2014, while making no appreciable contribution to supply.

Between 2010 and 2019, BMI forecasts an increase in Korea's oil consumption from an estimated 2.35 million bbl/day to 2.40 million bbl/day, and for the country's refining capacity to rise from 2.71 million bbl/day to 2.85 million bbl/day. Gas demand is expected to rise from an estimated 34.5 billion cubic metres in 2010 to a possible 41.6 billion cubic metres by 2019, and will be met largely by liquid natural gas (LNG) imports.

“Korean companies, such as KNOC and Korea Gas, are seeking natural resources throughout the world, as Korea, like China, needs secure stable energy sources,” said Steve Lim, chief executive officer at J.P. Morgan, Korea.

Yet, that’s not the whole story. “Korean firms, such as Samsung Electronics, are targeting overseas technology companies in order to secure intellectual property rights, and others with cash to spare, such as auto companies, are looking at complementary businesses and taking advantage of low valuations,” he added.

In addition to cross-border transactions for natural resources (and intellectual properties), there are at least two other major M&A themes in Korea: banking sector consolidation, and the government’s privatisation of assets nationalised after the Asian financial crisis.

The state’s remaining 57% stake (held by Korea Deposit Insurance Corporation) in Woori Financial Group is up for sale, and the controversial majority holding in Korea Exchange Bank, owned by US private equity firm Lone Star, might finally be sold within the next few months.

Other scheduled sales include Korea Development Bank, Daewoo Shipbuilding & Marine Engineering, and Hyundai Engineering and Construction. Creditors of the latter – which are also the controlling shareholders – were reported late last week to have set an imminent deadline for receiving bids for their stakes.

But, inevitably, Korean corporate activity in the international arena will attract the most attention. And gaining access to natural resources and energy supplies is increasingly important for Korea, especially as China continues to scour the world for commodity assets. Korean companies made 19 bids for foreign energy assets, including Dana, in the past 12 months, compared with 39 Chinese transactions, according to Bloomberg data.

KNOC paid $3.9 billion for Canada’s Harvest Energy Trust a year ago, but it was defeated by China Petroleum in a battle for Swiss-based Addax Petroleum, also in 2009. The Dana acquisition is KNOC’s biggest purchase so far this year.

But, some bankers are more circumspect about the international ambitions of Korean companies.

“Outbound M&A was a key theme three years ago, but since the global financial crisis Korean firms have been more domestically focused,” said Jae Wook Yoo, managing director and head of Korea investment banking at Morgan Stanley

“It has been a matter of gaining confidence. It is only recently that Korean companies have felt confident enough to install their own management teams when buying foreign assets, rather than relying on foreigners,” he added.

Yet, the value of announced outbound M&A deals this year already exceeds the total value of transactions in 2009 and 2007, and is close to 2008 levels, according to data-provider Dealogic. Volumes in 2005 and 2006 were negligible.   

There is also another compelling reason for Korean companies to look outside their domestic market for alternative assets.

“Korea Inc needs to diversify its investments”, said Terence Lim, co-head and chief executive officer of Goldman Sachs Asset Management in Korea. “The country’s financial assets are increasing rapidly, with cash pouring into the National Pension Fund ($1.5 billion net inflows per month) and into life insurance companies. This trend is likely to continue for the next 25 to 30 years.”

“Domestic interest rates are low, increasing the [gap versus] future liabilities for pension funds and insurance companies. Higher yielding assets are needed in order to pay out to retiring baby-boomers. Commodities and real estate investments have entered their radar,” Lim added.

¬ Haymarket Media Limited. All rights reserved.
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