Korea's powerful M&A

LNG power generator is bought by POSCO and Macquarie consortium for over $500 million.

The Korean Independent Energy Consortium (KIEC) has been sold by Korea's Hanwha and the US's El Paso in a simultaneous M&A transaction - an event that is not seen very often in Asia.

The fact that both were selling their 50% stakes in KIEC led to some unique challenges. In the case of El Paso, the US firm was keen to sell off its Asian assets, which included generating capacity in Southeast Asia, and this made it less price sensitive to the sale price of the Korean stake if it could be sold as part of a block. Paradoxically, in the case of Hanwha Group, it had decided that its power generation business was no longer a core activity. However, its goal was to fetch the highest price for its 50% stake, and hired JPMorgan to manage an auction independent of El Paso's.

KIECO is Korea's biggest independent power producer and accounts for 12% of power usage in metropolitan Seoul.

The twin sales saw Houston-based El Paso sell its 50% shareholding for $276 million to a consortium which included Macquarie Bank, Shinhan Life Insurance and the Korea Local Administration Officials' Mutual Fund. Hanwha's 50% was sold to POSCO for $289 million.

The auctions saw strong bidding. In the case of the Hanwha block, there were 33 bidders in February, while 18 signed letters of intent and 10 parties submitted for the final bidding. A final shortlist that included Korea's STX saw POSCO win with the highest bid.

Many believe that the success of the sale is in large part thanks to the attractiveness of the asset. Those who follow the Korean power sector know that the privatization and sale of five of the gencos was planned but that a change of government policy saw this plan scuppered last year. Indeed, the sale of Korea Southeast Power Company (Kosepco) had already stalled when Kepco could not nail down a water-tight power purchasing agreement (PPA) with Kosepco - a prospect that international buyers found off-putting.

In comparison, what made this genco asset so attractive was that a very lucrative power purchasing contract was already in place.

KIECO was the beneficiary of highly favourable negotiations six years ago thanks to the fact that its power generation capacity is LNG-based and the Korean government was then keen to sponsor the building of such generation output thanks to the environmental advantages. Those who know the details of the PPA say that it return on investment are close to twice local interest rates, ie around 10%.

Moreover, the PPA has six more years to run and then another PPA is triggered that runs to 2024. Korea currently gets most of its energy from nuclear generation and is keen to shift generation capacity away from environmentally-detrimental coal-powered generation to LNG.

POSCO, which was advised by Merrill Lynch, sees many synergies from the acquisition. It already produces 7.4% of Korea's power generation capacity, largely for its own capitive use in steel production - and sells any surplus power to Kepco, the national power company. If you add its existing 2400MW of capacity to KIECO's 1800MW it creates a sizable generating business.

But what makes the acquisition more compelling for POSCO is the fact that it is currently constructing an LNG importation facility, and therefore feels it can lower KIECO's LNG costs by combining this more efficient delivery mechanism.

The transaction is expected to close at the end of June. The Hanwha stake was sold by Hanwha Chemical Corp and Hanwha Living & Creating Corp, and sees it exit the power sector after 36 years. Min-Suhk Lee, a director at Hanwha, says: "It is a strategic move for Hanwha to sell its KIECO stake as we shift our business objectives away from the power sector. We feel that this is an ideal opportunity and we are very happy with the bidding result."

He adds: "This could have potentially been a very difficult process to manage had it not been for the large degree of coordination between the selling shareholders."

The acquisition by POSCO sees the world's premier steel company realize its goal of diversification - but in a related area where it already has operational experience. Its last attempt to diversify away from steel was six years ago when it tried (and failed) to enter the telecoms sector.

As a result of the sale, KIECO will remain firmly in Korean hands. Macquarie will own 14% of the genco; and the rest will be controlled by Korean entities.