The Jinro saga

Hite signs definitive contract to buy Jinro for $3.3 billion. But why is this soju-maker acquisition so symbolic for Korea inc?

Hite has taken its acquisition of Jinro to the next stage by signing a definitive contract on Friday to purchase the soju maker for W3.41 trillion ($3.31 billion). Hite, which has just completed a month of due diligence on Jinro, won a competitive auction. Its final acquisition price is W300 billion more than earlier rumours that it bid W3.1 trillion - beating out Japanese bidders as well as some local rivals in what was a highly competitive auction organized by Merrill Lynch.

From the perspective of Korea inc, Hite's victory was the best possible outcome. Jinro remains in Korean hands, and the marriage of beer and soju is highly synergistic.

The merger creates a national champion capable of pushing into China - where soju ought to be very popular, since the acoholic beverage goes very well with meat during dinners. Indeed, the new company could become the Samsung of booze, and will have a combined EBITDA of around $700 million versus $900 million for Asahi - putting it right on the heels of the most successful Japanese company in the alcohol segment. Bankers say this is a company that could easily grow into a $10-20 billion market cap entity.

In the run-up to the announcement of Hite's victory, there must have been many people who agreed, as Hite's share price ran-up 22% in anticipation. But some analysts have accused it of overpaying.

Goldman's beverage analyst downgraded Hite to a sell in mid-April despite the fact that Goldman Sachs special situations group, which owned a large chunk of the company, thought Jinro was worth W3.6 trillion.

JPMorgan, on the other hand, recently put out a research report entitled 'Hite and Jinro: a match made in heaven' and upgraded its 12 month price target for Hite to W147,000 - suggesting around 50% upside.

What is certainly clear is that Hite has put in place very cost-effective financing. KDB will sole underwrite a W1.6 trillion loan.

Meanwhile there is W500 billion of cash in Jinro, which implies that the Hite consortia will only have to inject around W1 trillion of equity. Hite's own stake in the consortium is around 51%, suggesting it will only have to come up with around W500 billion of its own cash to cement the transformational deal.

Hite has said it will eventually IPO Jinro, probably before 2007, which will allow the domestic private equity investors in its consortium to realize a gain.

All that remains now is for the Korean Fair Trade Commission to give its approval on antitrust grounds, with a decision expected later this month. Whether the FTC would seek to unravel a deal so obviously a win-win for Korea inc is an open question and would be evidence that Korea's bureaucracy is less coherent than many outsiders sometimes assume. The potential problem is that Hite has a soju business too. But with a 1.6% market share, it is a fairly insignificant business.

What are the precedents?

In one precedent, the FTC forbade the merger of Moohak and Daesun in December 2002 because they had a combined 97% stake in Kyungnam Province. In a recent case the FTC prevented Samick Musical Instrument and Young Chang from doing a deal, because the combined company would have a 92% market share in the upright piano business.

The combined soju market share of Hite-Jinro is 56%.

Goldman Sachs, Morgan Stanley, Deutsche Bank and the other major creditors will be hoping the FTC allows the deal to pass; as the deal would then likely close in July. Goldman would finally realize a substantial return on its 1998 investment.

Reports in the Korean media speculate it has made W1 trillion (about $1 billion) of profit, which is probably an exaggeration. A closer guess would probably be just shy of $500 million. Both Morgan Stanley and Deutsche, which also invested in Jinro debt, will make substantial returns too.

Goldman Sachs has been the most high profile of the foreign investors in Jinro, having filed for the company to go into bankruptcy - the event which later triggered the M&A auction. Goldman is believed to have spent around $30 million in legal fees since it started proceedings - with estimates of total legal fees expended in the Jinro case totaling $80 million in what has possibly been the most litigious situation in Asian corporate history. Indeed, even today there are around 45 lawsuits still outstanding that relate to Jinro.

What is Jinro and why did it go bankrupt?

Jinro is practically a national symbol in Korea - as important as Guinness to the Irish. Soju is Korea's traditional rice liquor, and Jinro is one of the best known brands in the country. And thanks to the popularity of the drink in Korea and Japan, the company sells about three times the global volumes of Bacardi rum and Smirnoff vodka - that is, around 56 million cases per year.

The most puzzling thing about Jinro is how it could have gone bankrupt at all. Founded in 1924, Jinro has long dominated the soju business, and enjoyed good margins.

In the most recent financial year its profits surged to around $250 million. Given it was the biggest player in a beverage that Koreans consume with a gusto, the only possible explanation for its bankruptcy was startling mismanagement.

Here we must turn our attention to a key figure in the drama that followed. That figure, of course, was Jinro's former Chairman, Jin-ho Chang.

His grandfather had founded Jinro, and thanks to his father's business acumen the company was in good shape when he passed away in 1986. Then between 1987 and 1991 a bloody legal battle followed between Chang and his elder brother over who would control Jinro.

Chang emerged victorious and took control of the company through a publicly-declared 12.44% stake and thanks to treasury stock owned by the company that was worth a further 41.92%.

No one doubts Chang understood the soju business. And according to one banker (who personally witnessed it on an evening out), he had an unswerving commitment to his company's product.

Chang's problem was he did not appear to understand many of the other businesses he took Jinro into. Principal among these was real estate and construction. Jinro took on massive debts to finance these investments in 1996 and when the Asian financial crisis struck and property prices tanked, the red ink began to flow.

With the native instincts of a chaebol patriarch, Chang also used debt at the operating company to bailout affiliates. Topping it off there were some fairly unusual accounting practices (for which Chang would later end up serving a jail sentence). One arrangement saw the company buying bottles each year from Chang's relatives when all the company's bottles were already recycled.

Inevitably, the $1.5 billion of affiliate lending crippled the company. It simply ran out of cash.

Chang was forced to turn to the Korean banks to restructure the debt. Luckily for him, the government stepped in and in the first quarter of 1998 ordered a special form of rescheduling called a composition.

This effectively stretched out the debt, without any loss of control on his part. The new deal allowed him to just pay interest owed, and gave him till April 2003 to repay the principal.

However, much of this debt ended up being transferred from troubled Korean banks to Kamco, the state asset management company charged with auctioning off distressed debt. Goldman's involvement began when it bought Jinro bonds as part of one of these auctions in 1998.

It bought still more in auctions in May and November 1999. Morgan Stanley would also be a major buyer, as later would Deutsche Bank.

It is not clear what exact price all the debt was bought at, but the original Kamco auction saw Goldman buy a major tranche at 23.5 cents in the dollar. This deal was struck on the basis that 50% of any profits made would be shared with Kamco (i.e. the Korean taxpayer).

Goldman then bought another large tranche of Jinro debt at around 35 cents in the dollar in May 1999 (this time with no profit sharing). And finally it bought a slice in a November 1999 auction, in a consortium in which GE was the junior partner.

Goldman ended up buying around $450 million (in face value) of Jinro debt, which comprised about a third of Jinro's total borrowings. This put the US firm in a strong position should Chang be unable to repay the principal in April 2003.

Of course, Chang was only going to be able to repay the principal if he could either sell a stake in Jinro, or sell-off affiliates and non-core divisions. There was some activity.

A beer joint venture with Coor's was bought by OB, and in 1999 Allied Domecq signed a deal to buy a 70% stake in a new whisky joint venture. This deal saw Jinro inject its Imperial whisky brand, and was named Jinro Ballantine.

More interesting still was an Allied Domecq suggestion that it buy a controlling stake in Jinro itself (but leave Chang as Chairman). This would have made considerable sense since Allied Domecq could have pushed soju through its international network - internationalizing the drink in the same way that sake had been internationalized before.

This deal, however, fell through due to points of difference - rumour has it that Chang's demands ended up making Allied Domecq's HQ nervous.

Had Chang done the deal the creditors would have been paid in full, his role as chairman would have been secured and he would have owned a (smaller) stake in a growing international business. Likewise by avoiding default, he would possibly have avoided the court cases that would later see him go to jail.

Instead, Chang took a more defiant route, expecting that if all else failed, he could persuade the Korean banks to reschedule the debt again and face down the foreign creditors using a barrage of nationalism. Perhaps this was not a surprise. Chang, after all, was a chaebol boss with powerful friends who apparently kept a crocodile tank in his office. He was clearly not very fazed by the prospect of American bankers calling his bluff.

Jinro did hire foreign bankers to offer it advice on its options. It initially mandated Schroders in 1998, but after its acquisition by Citigroup, that mandate passed to CSFB in 2001.

There is no doubt that Jinro was an attractive asset - in fact, it could be described as two assets. The Korean soju business is one component; and as already discussed, is a high volume business worth W1.4 trillion per year.

Equally, the Japanese business was also very exciting. All the major Japanese alcohol companies were interested in acquiring it. Indeed, soju has been successfully marketed in Japan as a higher margin beverage (in Korea it is a low end mass market drink) and retails at a much higher price.

In fact, it is one of the few growth segments in the Japanese spirits market. Its 24% alcohol content and herbal content have played to a more health-conscious consumer and it has become a popular ingredient in cocktails. Jinro's own marketing claims that its twice filtered Chamjinisulro soju helps drinkers avoid hangovers thanks to the asparagines it contains.

Thus, by 2002 formative discussions were underway to sell the Japanese business. There was a problem, however. Since the acquirors would be buying an asset rather than a company, the Korean tax authorities would impose a 50% capital gain on the value of the asset sold - over and above its book value. In the case of the Japanese business it had a very low book value of around $100 million, which would have seen a massive chunk of the value seep away in tax.

Obviously, no creditor was going to be keen on such leakage. And the key creditors were in a strong position to stop it happening anyway. That is because the Japanese business was not held by Jinro in Seoul, but by a separate Jinro affiliate in Hong Kong.

Goldman had been savvy enough to buy this company's defaulted bonds too and had the power to veto any such sale through the Hong Kong courts. Goldman's intent was that - in the event of default - Jinro would be sold as a whole - preferably through an international M&A process, since this would realize the fullest value for creditors.

By 2002, Morgan Stanley joined Goldman as a substantial buyer of Jinro bonds; and continued its buying throughout 2003. By this point the bonds were trading at just over 40 cents in the dollar. JPMorgan also took positions, but - unlike Goldman and Morgan Stanley - would trade out of them.

It was becoming evident that the foreign creditors were lining up for a showdown with Chang. Observers say that Goldman and Chang were at loggerheads. The US firm had lost trust in him and did not believe he was sincere about repaying the bonds in full or selling the business.

Goldman then signaled its intentions, by starting litigation against Jinro (Hong Kong) with a view to winding up the Hong Kong vehicle.

In a last ditch effort, Jinro (i.e. Chang) proposed a deal to creditors. It would buy back the debt for W1 trillion, or 50 cents in the dollar. It would take out bridge financing and then restart the M&A process with a view to selling the then unencumbered Japanese business.

Some of the Korean banks expressed an interest in this idea. Goldman rejected it - based on its conviction that creditors could be repaid in full.

In late March 2003 Goldman took the battle to Korea itself. This was the month when Jinro's composition period ended. And when Jinro missed a $58 million debt repayment a suit was filed to put the Korean company into receivership. The fact of the matter was simple. Jinro had failed to pay any of the unsecured debt, which constituted 95% of the almost $2 billion debt that had now accrued.

To say sparks flew at this action, would be a severe understatement. In Korea, the move caused pandemonium, and a nationalistic backlash. The idea of a foreigner putting the premier maker of soju - a national symbol - into receivership offended Korean sensibility.

The labour unions were not shy in offering their view. "We want Goldman Sachs to kneel down and apologise to Jinro for the mental and financial anguish it has caused us," Kim Jae-won, a member of the Jinro labour union said at the time. "We're ready to fight this to the death."

An inflammatory website even appeared that, among other things, photoshopped Goldman's logo onto a bottle of soju - in place of Jinro.

In the weeks after the petition was filed, union members likewise tried to break into Goldman's offices in Seoul, only to be repulsed by security guards. The union took out half page advertisements in seven newspapers to protest Goldman's audacity and staged a five hour strike in front of the Seoul District Court.

Meanwhile, the Korea General Liquor Wholesalers Association - which distributes around 80% of Jinro's products - pledged to stop delivering Jinro soju in protest.

Against this backdrop it is not surprising that Goldman's petition triggered probably the most litigious legal battle in Asian corporate history. Even today there remain 45 outstanding suits. Estimates of total legal costs run to $80 million. If you were a lawyer, the Jinro dispute was manna from heaven.

Indeed, immediately after Goldman filed, Jinro retaliated with its own suit in the Seoul Court, in which it sought to seize Goldman's bonds and receive W154.7 billion in damages. The gist of the case was that Goldman was being unreasonable and hindering efforts to attract foreign investors via its receivership suit. Jinro's lawyers argued that most Korean creditors supported the idea of a temporary rescheduling (while a new investor was sought) and Goldman was just out to broker a better deal in an entirely selfish and (unKorean) fashion.

Goldman had never had any experience of using the Korean courts before. And it got worse for the US firm, when Jinro's 2000 employees jointly filed a criminal case against it. The basis of this case was that Goldman had breached a Chinese wall in 1998 - when it was alleged its investment bankers signed an advisory agreement with Jinro - and thus, it was alleged, got privileged access to information.

Goldman denied any such agreement existed. Indeed, the situation was investigated three times and was eventually thrown out of court. Meanwhile Goldman bankers had to live with the daily prospect of the police taking out warrants to raid their hotel rooms or offices.

Jinro had also tried to launch an injunction against Goldman buying anymore of its bonds, but this was also rejected by the court.

The judge was, if anything, concrete proof that the Korean legal system does, in fact, work in the interest of creditors. After several weeks of deliberation, Judge Dong-gul Byun ruled in favour of Goldman and other creditors, and put Jinro into bankruptcy. The top 20 managers - all closely connected with Chang - were fired.

This was round one to Goldman, although Jinro immediately launched an appeal.

But running in tandem with this court fight was another, that was just as significant. The Korean government was investigating Chairman Chang - as part of its policy to clean-up the chaebol. Some view this as part of the catharsis of laying blame after the humiliation of the IMF bailout, and say certain figures were scapegoated. However, the instances of wrongdoing were serious, and Chang became, as one local banker put it, a "poster boy for the war against the chaebol".

On September 8, Chang was arrested for misappropriating W722 billion of company funds - some to bailout affiliates and W3.58 billion for personal use. He was sentenced to a seven year prison sentence (although would serve only 18 months).

A few days later Byun's court rejected Jinro's appeal.

At this point, it might look like the foreign creditors were well on top and had little to complain about. However, it was not that simple.

Chang's parting shot was delivered several months before his arrest, but it would prove significant. A few weeks before Jinro was put into receivership he orchestrated a deal whereby Jinro bought back W250 billion of secured debt (mostly from Hanvit Bank).

In M&A terms this was a classic defence mechanism, since in Korea the rights of secured creditors greatly prevail over those of the unsecureds (such as Goldman and Morgan Stanley). The secured debtors can normally control negotiations.

The plan was to then sell these secured bonds to Taihan Electric Wire, a low growth company, with a lot of cash. The foreign creditors suspected that family-controlled Taihan was in league with Chang. Rumours were rife that the respective families had close connections.

The new receiver of Jinro (who carried a business card with the title Chairman and CEO) was the court-appointed, Lee Won. In his first days in the job he signed a document authorizing the sale to Taihan, leaving the foreign creditors livid. It would be the start of an acrimonious relationship, both with Lee Won and Taihan.

Goldman and the foreign creditors turned their attention to the other domestic creditors. That's because aside from Goldman and Morgan Stanley, the creditor committee contained seven Korean institutions and a majority voting principle was in place.

Most of the Korean creditors were initially hostile, and keener to work out some sort of rescheduling - rather than agree with the foreign creditors that a sale of the business was essential. The receiver, Lee Won was also against the idea of an M&A transaction.

The foreign creditors now began lobbying hard and explaining their plans. With Chang in jail the nationalistic atmosphere quietened, making their job slightly easier.

The first breakthrough was the conversion of local creditor DITC, which came to understand the economic rationale. Other local creditors - with the exception of Taihan - gradually followed.

The majority of creditors were soon pushing for Lee Won's replacement, as they saw few signs of improvement under his watch. The employees of Jinro also started to come on side. They wrote letters to the court that questioned his abilities and asking that he be sacked.

By April 2004, they got their way, and Lee Won was replaced by You Kwang Park. At last, the foreign creditors felt they had someone they could work with. Park was ex-World Bank and immediately saw what needed to be done. He brought in a new auditor, and set about cleaning up the accounts.

Under his tenure the EBITDA would improve from around W127 billion to W250 billion in 2004, with 2005 forecasts closer to W300 billion - making a vast difference to the eventual valuation of Jinro when it was sold. Some of this could be accounted for by a price hike, but most was through cost control measures and the eradication of what the foreign creditors had always suspected was dubious accounting.

Park was also financially-incentivized by the court. He would be paid $250,000 if a sale took place.

The foreign creditors now realised that the managers of Jinro - in the tier beneath Chang's now departed inner circle - were very competent. Many actually welcomed the new regime, relishing the improvements in the financials and started to put together new plans to expand in China.

A new era

In April 2004, Chang's equity was wiped out. This was the product of a lengthy discussion that had begun the previous December in the court.

Typically in Korea, the court issues a restructuring plan and it is implemented in a fairly unquestioning way. Again, in a first, the foreign creditors - primarily Goldman - challenged the court plan and put forward its own. Initially there was a sense of horror that the gauche Americans were yet again causing trouble.

Then the economics hit home. The court plan was promising creditors a return of 50 cents in the dollar, while Goldman's was proposing 150 cents.

A series of lengthy negotiations ensued, and the court played off Taihan against the unsecured creditors. (Taihan had already proposed a deal to buy Jinro for W1.3 trillion, and was still the major secured creditor.)

However, Taihan's leverage as the secured creditor was not as strong as in former restructuring situations in Korea. That's because Jinro had begun to generate a lot of cash (around $500 million) thanks to superior management. That meant Taihan's exposure was already covered, and so its creditor rights were accordingly relegated beneath those of the unsecured creditors - who still had to get their money back.

Likewise the foreign creditors knew that if all else failed, they had the legal right to swap their debt into equity. At this point foreigners comprised 71% of the unsecured debt, with Deutsche Bank having become a major buyer too.

Hence, after protracted negotiations, a plan was agreed that was a compromise between the original court plan and Goldman's - the first time such a thing had happened in Korea.

This saw the unsecured creditors get 66% of Jinro's equity - with the remainder being kept by the existing shareholders (except Chang). And, in another first for Korea, the new plan stipulated that an M&A transaction would take place - as opposed to the more usual option of simply rescheduling debt and ordering a creditor haircut.

The court launched a beauty parade to find an M&A adviser. Many investment banks had conflicts of interest and could not bid. The final shortlist included ABN AMRO and Citigroup, but Merrill was eventually picked as the winner in mid-2004. It then spent the next three months negotiating its contract with the court.

Most observers are complimentary both about the decision to hire Merrill and of the job it did - eventually organizing an auction to international standards that paid creditors out in full. The US bank was paid Korea's biggest ever court-appointed M&A advisory fee. But at $4.3 million that says more about the previous fees than anything else - and Merrill put thousands of hours into ensuring this transaction was a success.

Thousands of hours were also being expended in Hong Kong with a similar goal - but by lawyers at White & Case.

This was in relation to Jinro (Hong Kong) the vehicle that owned the Japanese soju business. The dispute here was as long running as the legal battle in Seoul.

It had begun with a highly technical dispute about whether Goldman was in fact a creditor. This arose from the natureof eurobonds and involved a debate about the operation of clearing systems - this was settled in Goldman's favour.

The court decided that Goldman was a creditor because of a default under the deed of covenant. White & Case then advised Goldman that it didn't believe a liquidation should be pushed for. It suggested instead the Hong Kong practice of declaring Jinro (Hong Kong) in provisional liquidation, which is a preservative measure that can be used as a quasi-restructuring process.

What then added a layer of complexity was the fact that practically all the company's assets were in Japan. Luckily, the Japanese had recently passed the Acknowledgement and Assistance of Foreign Proceedings Act. This law basically said that the Japanese courts would recognize the status of foreign insolvency practitioners that had been appointed in other jurisdictions, such as Hong Kong.

Jinro would be the first time this law was tested. The groundrules were established by this particular case in the months between July and November 2003 in the Tokyo Bankruptcy court.

So far so good - but alas it gets less straightforward. Having made this legal breakthrough, Jinro's receiver, Lee Won, asserted that Jinro in Korea and not the Hong Kong company actually owned Jinro Japan. The basis of this argument was the fact that ownership in Korea is actually formalized by the transfer of a share certificate.

In the case of Jinro's Japanese business, Jinro (Hong Kong) had clearly paid for it, but had never received physical delivery of the share certificate from Seoul.

White & Case argued for the creditors that Jinro (in Korea) was merely acting as an agent and there had been "constructive delivery" of the shares. Proceedings were begun in Seoul. This resulted in an injunction and the share certificates being seized by a Seoul court bailiff.

With Merrill's appointment as the M&A advisor, the Hong Kong legal case took on a great significance. Obviously, half of Jinro's value lay in the Japanese business, and no one was going to want to buy Jinro if legal issues remained vis-à-vis that part of the business.

The foreign creditors were all-too-aware of this, and White & Case was instructed to come up with a solution whereby any purchaser would gain full ownership of Jinro's Japanese business too. The solution was a scheme of arrangement to deal with the share dispute.

An SPV was created in Ireland - which had a double taxation treaty with Korea - and a bridge was created for bondholders in the Hong Kong vehicle that provided them with a proper distribution from Jinro's overall sale. In return the share dispute relating to the Japanese business went away - giving comfort to the would-be purchaser.

The lawyers were given until July 31, 2004 to put the scheme of arrangement in place. It would normally take four months and require tax advice, two court hearings and a creditor meeting. By compressing the schedule, the scheme was made effective on July 28.

The M&A begins

That done, the M&A process could begin. The next six months were spent by Merrill, the Seoul court and Jinro's management in due diligence. Bankers say the resulting documentation was outstanding.

By the second half of 2004 most of the main bidders had already made their intentions clear. Korean food group, CJ declared its interest and partnered in a consortium with Japan's Kirin. Lotte Group (which made whisky) had partnered with Japan's Asahi. Doosan partnered with JPMorgan Capital Partners.

In all three cases, the consortia would probably have split the business - with the Japanese taking the soju business in their domestic market, and JPMorgan merging Doosan's Japanese soju business with Jinro's to create a market leader. The Korean party would be left with the Korean business.

Taihan was another obvious bidder. The seriousness of its bid became clear when the Financial Times ran a story stating that HSBC would finance it - although this financing later disappeared when HSBC gave the matter more consideration. Taihan, however, felt compelled to make a public statement in the media that it was not a vehicle to allow former management (ie Chang) to regain control.

Chang meanwhile had been released from prison, and had issued a public apology: "I feel deeply responsible for hurting Jinro employees and the company's reputation as well as causing social outrage. I beg the court show generosity as I am sincerely regretting my actions."

However, a Damoclean sword still hung over his head, with two criminal cases still outstanding against him. As such he kept a low profile during the M&A process.

Other consortia were formed by Dongwon, and Daesang.

However, the most interesting consortium was that formed by the eventual winner, Hite Breweries. With a 55% share in the local beer market, Hite saw obvious synergies from creating a local beer and spirits powerhouse.

Its enigmatic boss, MD Park - the son of the founder - had transformed Hite into the acceptable face of corporate Korea. He had managed to overtake OB as the number one domestic brewer, brought in Carlsberg as a shareholder, and had an EBITDA margin of 38%.

Above all, the business was focused on its core competency - just what the government wanted to see all Korea's family-run businesses do, rather than try and have tentacles in every industry.

Park decided that his consortium members had to be highly reputable and non-offensive to the Korean public. Advised by UBS and KDB, his nine-strong consortium let Hite share the financial burden of the bid and also brought in domestic private equity - just at the time when foreign private equity firms such as Lone Star were being lambasted in the local media. His consortia included the KCTU Teacher's Fund, the Military Pension Fund, the Korean Federation of Community Credit Cooperatives and KDB's own private equity arm. KDB would provide the debt financing.

In the opening weeks of 2005, the Korean M&A business started with a bang. Standard Chartered purchased Korea First Bank and Doosan bought Daewoo Heavy Industries.

All this signaled a hot market; and few doubted that the bidding for Jinro would be anything but competitive. The company's financials had improved dramatically and some were forecasting EBITDA of W300 billion for 2005. The company had come a long way from the Chang days when it earned only W130 billion. Likewise Taihan's former offer to buy Jinro for W1.3 trillion now looked way off the mark.

There was much gamesmanship at this juncture. An anonymous banker told the Financial Times that it was worth W2.5 trillion at most; Goldman, unusually for a creditor, put out a press release stating the business was worth W3.6 trillion. It's easy to see its motivation. That figure would have seen unsecured creditors redeem more than 100 cents in the dollar.

In February, bidders were given access to the dataroom and had until March 30 to make their bids.

On March 15, the process hit a setback when the Japanese Assembly reignited a row over the Dokdo Islands, by assigning them a national day. The islands are currently occupied by a detachment of Korean police and the Japanese action led to the burning of Japanese flags in Korea. Indeed, Korea's Foreign Minister, Ban-ki Moon called the vote "deplorable".

Suddenly, virtually all of the Japanese bidders - and their critical financing power - dropped out of the auction. It would have been too political for the Japanese to bid for a Korean national 'treasure' at such a time.

With the exit of the Japanese strategic buyers, the remaining Korean-dominated consortia were in the driving seat. It is rumoured that some consortia were going to bid way in excess of W3 trillion, and then revised their bids down to the W2.8-2.9 trillion level after the Japanese retreat.

The only bid to exceed the psychological W3 trillion mark came from Hite, which won the bid with W3.41 trillion. This bid almost exactly paid unsecured creditors out 100 cents in the dollar - while also providing some excess equity upside (based on the deal struck in the revised court plan).

Overall - both for Korea inc, and Asia as a whole - this remains one of the most significant transactions since the Asian financial crisis - and certainly the longest running. Jinro's restructuring and sale is symptomatic of the transformation of corporate Korea since the crisis - and the ditching of some of the worst practices of the chaebol system.

Moreover it has also demonstrated that creditors in Korea can exercise their rights through a proper court process. Indeed, it is a testament to the fact that the legal system ultimately works and does so without fear or favour of the creditor's nationality. And finally, it is an object lesson for Korea's family elite of the penalties to expect if they don't repay their debts.

Backlashes against foreigners are all the rage today in Seoul, especially as a lot of Koreans feel like they have been fleeced by foreigners since the financial crisis. But in this case the Deputy Prime Minister and Finance Minister, Han Duck-soo told the National Assembly: "If (they) made profits in a lawful way by accepting risks in their acquisition we cannot say that it is a leak in national wealth. Even in Goldman Sachs' purchase of Jinro (debts), evaluations were made over the possibility of redeeming the NPLs and related price valuations were made. From the current perspective, controversy over a leak in national wealth may be possible. But at that time, the chance to acquire Jinro debts was open to both domestic and foreign investors, and the most important standard in taking over the debts was the acquirer's willingness to accept the risk. If the debts had not been sold to Goldman Sachs at that time, Jinro would not be the company it is today."

It is a good point. Jinro is a much better company today (as evidenced by the price paid for it) and the combination with Hite will create a truly great company. And the more great companies there are on the KSE, the better it is for Korea and Korean investors.

Nor is it only foreigners who have made money out of the M&A transaction. Taihan will also do well out of the sale. Taihan bought 75% of all the secured debt at 90 cents in the dollar, and will redeem at 190 cents in the dollar - i.e. making a profit of around W250 billion.

The only loser is Chang.

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