On the decline

Korea may record worst M&A year since global financial crisis

Troubles around domestic economy and regional trade relations have led to a sharp decline in corporate restructuring and strategic investment deals.
Escalating dispute between South Korea and Japan caused M&A activities to slow
Escalating dispute between South Korea and Japan caused M&A activities to slow

South Korea is set for the weakest year for mergers and acquisitions in more than a decade as large conglomerates and private equity firms stay on the sidelines amid worsening economic conditions at home and challenging diplomatic and trade relations abroad.

As of August 23, the country’s total M&A volume stood at $27.4 billion, according to Dealogic figures. By comparison, there were $40 billion-worth of deals completed in 2009, the weakest M&A year of the past decade, when investment sentiment generally was dampened by the global financial crisis.

To be sure, there are still four months to go until the end of the year and it is possible that the figure could end up above the $40 billion mark if there is a year-end M&A boom. However, market observers believe that is unlikely in the absence of any mega conglomerate restructuring deals.

Some bankers and analysts attribute the relative absence of activity to the struggling domestic economy. South Korean GDP contracted by 0.4% in the first quarter – its worst quarterly performance since the global financial crisis. 

Although economic growth swung back to record 1.1% growth in the second quarter, observers believe that was due to a one-off increase in government spending. They are sceptical about whether the growth can be sustained through the rest of the year as the US-China trade war continues to weigh, with Korean exports seen on course for their ninth straight monthly decline.

The government cut its own calendar year forecast to a seven-year low of 2.4% to 2.5% in July, but some economists are more pessimistic. Those at Goldman Sachs, for example, reportedly cut their forecast to 1.9% earlier this month and expect the Bank of Korea to cut interest rates again this year.

And it could get even more challenging for the export-dependent country now that it has become embroiled in a trade dispute with Japan.

SHRINKING M&A MARKET

In recent years South Korea’s M&A landscape has featured large corporate restructuring and strategic investment deals.

One good example was the year 2015 – the country’s record M&A year with $108 billion-worth of deals. Highlights from that year include the mega restructurings of the country’s two leading conglomerates, Samsung and SK.

The $25 billion merger between SK Holdings and SK C&C, together with the $11 billion consolidation of Samsung C&T and Cheil Industries, together account for nearly one-third of the year’s total M&A volume.

2015 also saw the conclusion of private equity firm MBK Partners’s $6.4 billion buyout of discount retail chain Homeplus. It was the largest Asia Pacific targeted financial sponsor-led entry M&A deal on record at that time.

So far this year there been no major corporate restructuring and strategic investment deals. Instead, there have been more distressed situations involving asset sales by financially-strapped entities.

Hyundai Heavy Industries’s $4.2 billion purchase of a 55.7% stake in Daewoo Shipbuilding & Marine Engineering (DSME) currently stands as the largest M&A transaction this year. The sale allowed Korea Development Bank, which rescued DSME from bankruptcy through a series of bailouts and debt-to-equity swaps two years ago, to dispose of the distressed assets.

The second-largest M&A deal involved debt-ridden Hanjin Shipping. A group of creditors, including Korean and Filipino banks, agreed to take a combined 83% stake in the container carrier for $2.6 billion.

Distressed situations are typically complex in nature and take a long time to close. As such, some bankers and analysts believe the sale of debt-laden Asiana Airlines, which is expected to fetch some W1 trillion ($823 million), is unlikely to close this year as the family owner has hoped. 

Other potential transactions this year include LG Group’s stake sale in its IT business. The 37.3% sale of LG CNS is tipped to fetch around W1 trillion.

Meanwhile, IMM Private Equity is looking to complete the sale of Tailim Packaging and Tailim Paper, South Korea’s largest manufacturer of corrugated fibreboards, by the end of this year in a W600 billion to W1 trillion deal.

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