Korea mandates Daewoo privatization

One of the first Daewoo group companies to complete its financial workout hopes to become the first since the financial crisis to issue international equity.

The Korean government is planning to sell up to 15% to 20% of its stake in Daewoo Shipbuilding and Marine Engineering (DSME) during the fourth quarter. JPMorgan is believed to have been awarded sole books for a GDR which will raise between $200 million to $300 million based on today's (Thursday) market price of Won9170 per share.

The sell-down will consist of a combination of existing shares held by the Korea Development Bank (KDB) and Kamco. Currently, 31.1% of DSME's 198.3 million shares are in freefloat, with KDB holding 40.8%, Kamco 26.1% and other creditors the remaining 2%. The two acquired their stakes at Won7,845 in the autumn of 2000 via a debt-for-equity swap, with the company formally existing its debt rescheduling in the summer of 2001.

Since then the government has made unsuccessful attempts to find a strategic buyer and analysts say the prospective privatization has been a continual weight on the share price, although it has performed well this year, up 44.1% year-to-date. At its highest, DSME's share price hit the Won10,100 mark in mid-March before falling on the news that first quarter net income had fallen 27% year-on-year to Won50.8 billion ($41.58 million).

However, the first quarter figures reflected low margin shipbuilding orders for bulk and container carriers taken in 1999 when the Daewoo group was unraveling. Virtually every analyst has a buy recommendation on a company, which has won many plaudits for eating market share as it cleans up its balance sheet. Debt to EBITDA, for example, has halved since the end of 2000 and now stands at one times 2002 earnings.

As Nomura analyst DS Lim concludes, "DSME remains our favoured exposure to Korean shipbuilders. It has a clean balance sheet and corporate governance that we view as among the best on offer in Korea. Finally there are no cross shareholdings. DSME has the best product mix at home and ROEs that outstrip peers."

The Korean shipbuilding industry overtook Japan in 1999 as the world's biggest and in 2001, the three big operators - Hyundai Heavy Industries (HHI), DSME and Samsung Heavy Industries (SHI) - had a 37% global market share. Analysts also add that while DSME sits in the number two slot behind Hyundai, it is better positioned because it has captured the largest market share of the fast growing and higher margin LNG sector - 33% to SHI's 15% and HHI's 10%.

Stricter environmental controls have favoured the use of cleaner energy sources such as natural gas and analysts say that clients tend to prefer DSME's membrane shipbuilding model, which is cheaper to build and gives ships a lower centre of gravity and better visibility for crews.

In the run up to its GDR offering, DSME has also entered a buy-back programme for its shares in the home of underpinning the price. In late May, it said that it will buy back six million shares over the six months to end November, representing just over 9% of its freefloat.