Kumho Tire gets China bailout before deadline

In the biggest Chinese outbound M&A deal in Korea, Qingdao Doublestar agrees to buy 45% of the South Korean tyre maker for $597 million with the threat of bankruptcy looming.

China’s privately-held Qingdao Doublestar will invest W646 billion ($597 million) for a controlling stake in Kumho Tire, the Shenzhen-listed company announced on Monday, striking a cut-price deal to take control of the debt-laden South Korean tyre manufacturer after dropping its initial bid last year. 

The transaction, which will see Doublestar taking a 45% stake through a capital injection and looks set to be corporate China's biggest-ever Korean acquisition, puts an end to the prolonged saga over the future of the decades-old tyre maker, which has dragged on for years.

Most importantly, the capital injection is a last-ditch effort to rescue Kumho Tire ahead of a March 26 deadline set by its creditors. Korean Development Bank (KDB), Kumho Tire’s main creditor, has said it would initiate bankruptcy proceedings for the tyremaker if there was no restructuring plan for its $3.7 billion outstanding debt before then.

The deal is seen as a coup for Doublestar because it would enable it to take control of the Korean company at a roughly one-third discount to its initial offer.

Doublestar won the auction for a 42% stake in Kumho Tire for $843 million in March 2017 but then decided against proceeding with its bid six months later, citing a worsening business performance and faster-than-expected profit declines in the Korean tyre maker.

According to the latest announcement, Doublestar will buy 129.2 million Kumho Tire shares priced at just W5,000 each. The Chinese company would be left as the biggest shareholder after the deal is completed, while creditors would see their combined stake diluted to 23.1% from 42%.

The market responded negatively to the news, sending Kumho Tire's share price down nearly 10% to W4,690 by the end of the day. The company’s labour union also said it will attempt to block the deal since it is opposed to foreign ownership and fears mass layoffs, despite the looming receivership threat. 

The transaction is subject to regulatory approval and is expected to close by the end of June.Credit Suisse is the financial advisor for Kumho Tire and its creditors. 

At $597 million, the transaction is set to be the biggest outbound acquisition by a Chinese company in Korea. Anbang Insurance’s ongoing $1.05 billion bid for a 63% stake in Tong Yong Life Insurance currently stands as the biggest deal, according to Dealogic, but that is unlikely to proceed after the troubled insurer failed to settle the payment last year.

LEGACY OF FINANCIAL CRISIS

By accepting a Chinese bid, Kumho Tire is able to prevent another serious blow to Korean corporate sector after the fall last year of Hanjin Shipping, the country’s largest container line.

Kumho Tire's troubles can be dated back to 2010. The company had been owned by Kumho Asiana, but control was handed over to Korea Development Bank after the Park family-owned conglomerate ran into serious financial difficulties after the 2008 global financial crisis.

When KDB launched the auction to sell the company in 2016, Kumho Asiana chairman Sam-koo Park exercised his right of first refusal to match Doublestar’s bid, hoping to take back control of the tyre business his father founded 58 years ago. However, the chaebol eventually dropped out after failing to secure sufficient funds for the offer.

On paper Kumho Tire does not appear to be a good bid for Doublestar since it has been losing money since 2015.

However, the Korean firm will likely complement the little-known Chinese company in terms of brand recognition, because Kumho Tire is one of the biggest sponsors of top-tier sports events and teams globally.

Kumho Tire is currently an official sponsor of the National Basketball Association (NBA), and has sponsored the Auto Grand Prix World Series and Spain’s top soccer league, La Liga, before.

On the club level, the company is now a sponsor of Tottenham Hotspur, the English Premier League outfit that Korean soccer star Heung min-Son currently plays for.

Kumho Tire has also sponsored England’s Manchester United, Germany’s Schalke 04, and NBA basketball franchise Los Angeles Lakers in the past.

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