LIG Corp agreed last week to sell a 49% stake in LIG Nex1 to a group of Korean investors. The troubled company will use the proceeds to repay loans raised to meet the cost of put options exercised by investors in LIG Engineering & Construction in 2011.
LIG, which is owned by the LG Corporation, one of South Korea’s largest conglomerates, received W420 billion ($388 million) in cash from the eight domestic investors for the minority stake in LIG Nex1, an aerospace and defence company.
Citi acted as the exclusive financial adviser to LIG on the transaction.
LIG owned 100% of LIG Nex1 which is the firm’s main operating subsidiary. However, LIG accumulated debts of W500 billion, charged at 8% interest a year, needed to finance the LIG Engineering & Construction options.
The W80 billion not covered by the proceeds of the LIG Nex1 share sale will be refinanced by the lenders, according to a person familiar with the deal.
LIG’s problems were made worse by the arrest last October of Koo Bon-sang, LIG Nex1’s vice-chairman, the eldest son of Koo Cha-won, chairman of LIG Group. He was suspected of fraudulently issuing commercial paper in 2011.
Oh Chun-seok, president and chief executive of LIG, and Jeong Jong-oh, the former chief management official at LIG Engineering & Construction, were also arrested for their alleged involvement.
Prosecutors claimed that W189.4 billion worth of commercial paper was issued under the name of the construction company even though it was on the verge of court receivership. The case is still pending.
The new investors in LIG Nex 1 include STIC Investment and Hana Daetoo Securities, which invested W150 billion and W100 billion, respectively. The others are Dongbu Securities KB Asset Management, Daishin Securities, Heungkuk Asset Management, KTB Private Equity and AJU IB Investment.
Based on the latest disclosed financials from 2011, the transaction values the company at 16.6 times earnings (before interest, taxes, depreciation and amortisation) and a price-to-earnings ratio of 36.1 times.
Under the terms of the deal, LIG is required to make an initial public offering for LIG Nex1 by the second half of 2016, earning a specific (but undisclosed) yield for the new investors.
Alternatively, LIG can call the shares back at that defined yield.
If neither event happens, then shareholders can instigate a “drag-along right”, taking the 51% of LIG Nex1 that they don’t own, allocated proportionate to their existing holdings.
The investors are not acting in concert and each will own less than 20%, so the transaction is expected to close today.
The deal follows an earlier to attempt to sell a stake in July last year, when an unidentified European company and four Korean private equity funds bid for up to 49% of the company.
LIG Nex1 was set up in 1976 as Goldstar Precision, and was subsequently known as LG Innotek and then NEXFuture 1.
It is a leading Korean defence contractor and develops and manufactures a wide range of advanced precision electronic systems and products for intelligence, surveillance and reconnaissance; command, control, communications, computers and intelligence; electronic warfare and avionics.
The company is the sole domestic provider of guided missiles and radar systems to the Korean military.