The price paid by Kumho has not been disclosed, but as is customary in Korea there have been some fairly well-informed leaks in the local media. Kumho is reckoned to have won the bid with a W6.6 trillion ($7 billion) offer. This beat out a rumoured W6.4 trillion bid from the Doosan Group.
Most M&A practitioners had expected Doosan to make an aggressive bid. In January 2005 it had paid $1.8 billion for a 51% stake in Daewoo Heavy Industries in a similar auction. This bid had blown away the competition, since it represented a 220% premium to Daewoo HeavyÆs stock price.
In this case KumhoÆs bid was also anything but shy. The price represents a PE multiple of 19 times 2006 earnings, against the backdrop of a Korean market that trades closer to 10-12 times. Or consider that when news of the bidding broke on June 9, the value of the 72% stake was W3.05 trillion (at the then current market value).
Citigroup and Samsung Securities deserve credit û as M&A advisers to the selling creditors û for creating a frenzied auction process. There were five consortia bidding. Kumho and Doosan always looked to be the frontrunners, but adding to the mix were Eugene (a cement maker), Prime (a real estate developer), and Samwhan (another construction firm). There were no standalone foreign bids.
The exact size of the bid cannot be disclosed yet because the price will be subject to final due diligence and some negotiation via a price adjustment mechanism. The deal is scheduled to finalise in mid-August after these details are ironed out.
Another issue which will need to be negotiated is how much debt can be used. It is reckoned that the answer is ænot muchÆ. ThatÆs because Kamco û having seen Daewoo Construction hit financial difficulty once û does not want to see the entity debt-laden again.
Indeed, the Kumho consortia û advised by JPMorgan û deliberately put in place enough equity commitments to ensure that the deal can be paid for without any debt. The consortia includes local pension funds, local private equity firms and some foreign private equity money. The names of other consortia members have not yet been disclosed, however. It is reckoned that Kumho will own just under 50% of the consortium.
The Kumho conglomerate was already the 9th biggest construction firm in Korea. This deal will catapult the firm past Hyundai Construction to become the countryÆs top builder.
There is no doubt that Daewoo Construction was a prized asset. The firm has been growing at 14% per annum since 2001 and is ranked number one in the residential apartment market. Indeed, in recent years the booming apartment market in Seoul has seen brand become more important û and Daewoo has achieved a similar top status in buyers' minds to Sun Hung Kai in Hong Kong, according to local bankers. Its financials have accordingly improved too, with operating profit rising 23% last year, and sales for 2006 forecast to hit W5.5 trillion (up from W5.1 trillion). The company has an order backlog of $18 billion.
The other area of growth is in foreign markets, where Daewoo has been particularly successful in winning contracts in the Middle East, as well as India, Vietnam and China.
Indeed, in terms of the rich price Kumho is paying, the Korean firm justifies it in terms of synergies it reckons it can realise. Kumho has a big logistics business, as well as airline, Asiana, and it reckons costs can be saved by integrating these with DaewooÆs local and foreign construction businesses û ie moving staff around more cheaply on the airline as well as sourcing materials more efficiently via its logistics business. The international business currently represents about 15% of DaewooÆs revenues.
Kumho is controlled by the Park family and the current chairman is Sam-koo Park, the third son of the founder. The family successfully steered its group through the Asian crisis, with none of its businesses going bankrupt. Indeed this may have played a role in its victory. About 35% of the bid process revolved around the so-called ethical standards of the bidders û where Kamco looked at whether the bidders had evaded tax, or given political bribes, or faced financial difficulties due to fraud or other irregularities.
This huge deal will certainly make a dent in the M&A league tables. Thanks to this transaction and the Kookmin-KEB deal, the announced M&A league table for the first half of 2006 has now surpassed Korea's M&A volumes for the whole of 2005. And given its involvement on both deals, Citigroup has rocketed to the top of the Korean M&A league table alongside Samsung Securities.