Leven's hot on Korean M&A

Goldman Sachs head of Asian M&A, Johan Leven discusses some positive trends in Korean M&A.

What are the trends you are seeing in Korean M&A?

We are now seeing more deals being done to international standards. Professional advisors are being given greater autonomy to do deals. The principals are increasingly letting their advisors get on with it without detail-managing. That is producing very nice results. A good example of this was the sale of Hyundai Petrochemical.

In the case of Hyundai Petrochemical it was very important that Woori, one of the creditor banks, drove the disposal process. Is this likely to be a continuing trend?

We would hope so. It certainly proved an effective model. With this deal there is now an example of a very successful outcome. The deal had been attempted before - unsuccessfully - and this time ended up getting done, and at a very high recovery ratio of nearly 80%. Woori Bank ran the deal throughan international, transparent process where the creditors could take great comfort that this was the best outcome available. They were very determined not to repeat mistakes made by others in the past, being very focused on getting the decision making process right and on maintaining confidentiality. We see this as a benchmark and hopefully there will be more such deals.

What was your view on the Kumho Tyre sale, where the buyer was the National Military Pension Fund?

Each deal is individual and this was interesting because it was a non-traditional buyer. It appeared driven by a financial rationale to find long-dated, high yielding asset exposure. In this regard, it seems similar in concept to Chunghwa Telecom shares being sold to Cathay and TCC in Taiwan. It is the same idea of matching long-dated assets with long-dated liabilities.

Has the sale of Chohung to Shinhan been positive for Korea?

It has. There are three buckets of deals in Korea. There are the sell downs by government; the sell downs by creditors; and then normal private M&A. The Chohung deal is a good example of the government taking another important step to transfer ownership back to private hands. It is important for Korea.

Going back to the Hyundai Petrochemical deal, it clearly signals a trend. How much could follow?

We are talking about potential creditor-related deals worth billions of dollars. Prior to Hyundai Petrochemical, there had not been a successful example under the new Korean corporate restructuring legislation, where a company had been restructured through an M&A transaction. This shows that not only does the concept work, but the government has achieved a tangible example of what it set out to do with the legislation. It was really driven by Woori Bank.

Was Woori the major creditor?

There were about 65 or so creditor institutions, and Woori was one of the larger ones. However, they were by no means the overwhelming creditors here. They were picked by the creditor committee for the job of handling the M&A process on a day-to-day basis.

Given they have this experience and a lot of exposures, is Woori going to be the bank that drives a lot of similar M&A transactions?

The vision and wisdom of Dr DH Lee, the president of Woori Bank and the head of their restructuring office, YB Park, set an example. They ran the sale to global standards and all the creditors have now seen first-hand how a well-managed M&A process can result in a superior outcome for the sellers. I would have thought that, going forward, they will be in a good position to apply the same mentality that made the Hyundai Petrochemical deal successful.

There is a lot of private equity money in Korea looking to do M&A. Are there enough deals to sustain them all, or will some close down?

Most private equity fund commitments are not drawn down, but get drawn down when a transaction happens. But it is true that there is significant competition between private equity providers for transactions. We see intense competition in many auction situations. I believe the odds are there will be a bit of a shakeout. We will see a clearer tiering between those who can sustainably execute transactions with reasonable returns and the rest.

What's your view on certain private equity firms exiting their investments in the Korean banking sector. Will this be harder now that Chohung has been sold, and there seem to be four big bank groups?

The big four groups need to continue to make strategic progress themselves and there is more consolidation needed in the banking market,so financial investors who hold stakes in banks are likely to have attractive opportunities to exit over time. Recently, the asset quality issues in the banking market, particularly within the credit card sector, have been a problem for the sector. But we are seeing some cautious optimism that the worst may be behind Korean banks at this point.

There have been some M&A mandates in the insurance sector. Is that going to be a tough proposition?

Korea is an under-penetrated marketwith attractive fundamental dynamics. It will become increasingly attractive as the whole financial services sector continues to develop on the product front and the investment trust sector gets resolved. There will be a profitable, attractive insurance sector over time.

Do you see the sale of Hyundai ITC to Prudential as the first of many deals in the ITC sector?

The ITC sector has its own problems and there is clearly a need for operations and assets to continue to get restructured and for consolidation in this sector. The jury is still out as to the best form and home for many ITCs.

Will Korea be the hottest M&A market in Asia outside Japan?

It's going to continue to be a very important market. It's a large regional market with very significant restructuring and consolidation needs. It will continue to rank highly in the M&A league tables in the region.

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