Doosan Uses Global Crisis as Chance to Get Ahead
The global economy is struggling, with Korea Inc. not exempt from its effects.
Korean firms are doing what they can to keep afloat but Doosan Group is trying to get ahead of the pack.
The conglomerate, focused on heavy industry, has preemptively been engaged in boosting its liquidity even before the full brunt of the global economic meltdown came Korea's way.
After initial difficulty that in the summer months forced the group to pump $1 billion into units which last year borrowed heavily to take over companies of U.S.-based Ingersoll Rand, it appears to be standing on firmer ground.
"It is highly unlikely Doosan Group will
Liquidity Is Everything
Big corporations are trying to secure liquidity, seeing tougher times ahead.
Doosan's efforts to lower debts and boost liquidity have been well under way.
A month ago, Doosan said it will sell 100 percent of its packaging business unit to a private equity fund, MBK Partners, for 400 billion won by the end of this year, to solidify its financial structure.
Doosan said it will be able to settle 199.2 billion won in debt and secure 200.8 billion won in cash from the deal to sell Techpack ― Korea's No. 1 packaging company by market share.
"We are still positive about Doosan Group. It has already sold its packaging unit and is forecast to continue restructuring efforts to lower leverage by selling non-core assets," Citi Group said in a research finding.
"Yes, we are positive about the decision. Doosan's debt ratio will lower to 46 percent, while its net borrowings are expected to decrease 482.4 billion won from 882.4 billion won," Hyundai Securities said, adding the brokerage is maintaining a "positive outlook" for the group.
As another "consistent" move for a better corporate financial structure, Doosan now plans to separate its defense business operations and make them an independent entity by the end of 2008.
Doosan officials say the "Doosan DST," which will have an initial capital of 396.9 billion won with debts of 146.3 billion won, will only focus on the defense sector, to manufacture armored vehicles and other weapons systems.
But industry officials and even Doosan insiders say the very recent decision is a pre-emptive measure for the group to spur its ongoing restructuring efforts for more cash.
"As far as I know, Doosan Infracore ― the group's heavy equipment unit ― will completely drop the defense business within the first half of next year. Doosan will secure a maximum of 600 billion won by selling the defense unit," a high-ranking industry source told The Korea Times.
"Deciding to sell a business unit can be one of the hardest decisions chief executives have to make. Some cannot bring themselves to wield the axe. But a growing body of evidence suggests that smart sellers can earn impressive returns," another industry source said, citing Doosan's Ingersoll timing was good.
Meanwhile, Doosan Infracore is known to have sold 22 percent of its stake in Korea Aerospace Industries and properties in Incheon, Gyeonggi Province for similar purposes. Doosan Engine, an unlisted unit of Doosan Heavy, is reviewing the possibility of selling its 10.15 percent share in STX.
"Our top priority is to strengthen investors' confidence. Some are painting a negative picture of our Bobcat business. But such worries are rather exaggerated," spokesman Shin Dong-gyu said.
Analysts say the restructuring efforts have well echoed previous promises, after the group gave up its bid for a stake in Daewoo Shipbuilding & Marine Engineering.
"Our decision not to bid for Daewoo Shipbuilding has freed us to spend money to improve debt-equity ratios at overseas units," according to Shin.
Hanwha Group, selected as preferred negotiator, which has seen stocks tumble as markets fear that their buyout plan comes at a time when lenders tighten their purse strings, making the firm raise a bigger portion of funding.
But concerns are still high over the future of its Bobcat business.
Analysts say signs of deterioration of machinery demand in the U.S. and Europe and a weakening local currency hit by the global economic slowdown will burden the group and Infracore.
In the third quarter, Doosan Infracore reported a net loss of 43 billion won, as a weaker won inflated its financial burden on overseas debts. In the previous quarter, the company reported a net profit of 47.2 billion won.
Another spokesman Jeong Kyong-O said Korea's won has dropped nearly 30 percent this year against the greenback, inflating the book value of Doosan Infracore's dollar-denominated debt in local currency terms.
"We will push very intensive restructuring measures for our Bobcat business as planned," Jeong said.
According to Doosan officials, the group is pursuing restructuring of more than 70 Bobcat construction vehicle factories around the world to improve labor productivity and cut fixed costs.
Its global restructuring is expected to help raise Bobcat's sales by $110 million to $150 million.
Doosan Holdings Europe and Doosan Infracore International had borrowed $2.9 billion to fund a $4.9 billion purchase last year of Ingersoll Rand's three business units ― Bobcat, Ingersoll Rand Utility Equipment and Ingersoll Rand Attachments.
The deal still is the biggest overseas acquisition by a Korean firm.
Holding Company System
Doosan Group is on the right track to transform to a holding company system ― another key catalyst for Doosan for greater investors' trust.
Doosan officials say dropping its packaging business has also been in line with efforts to transform to a holding company system.
"Investors are also concerned with the group's management structure. We are easing worries over management by departing from the group's control structure, based on a cross-shareholding scheme," Shin said.
Doosan announced a plan for a holding company system in January 2006.
For measures, the group separated its magazine and printing businesses, while it spun off bio-related business in December last year. In November 2006, Doosan dropped its "Kimchi" business.
The cross-shareholding system in South Korea has been accused of being the main means used by "chaebol" owners to exercise control over entire conglomerates despite their small interests.
Under the system, subsidiaries' trouble often has an adverse effect on other subsidiaries and makes them vulnerable to hostile takeovers.
It has also been cited as a major factor for the under-valuation of South Korean companies.
Doosan was fined by the nation's anti-trust watchdog in 2007 as the group's two subsidiaries ― Doosan Industrial Development and Doosan Heavy & Construction ― unfairly supported other units in the group, including the consulting arm Neoplux, by paying higher purchase prices.
The two subsidiaries were also found to have paid interest on loans taken out by other units on behalf of them.
As well as restructuring for increased corporate transparency and to soothe investors' worries over the future of the group, Doosan plans to continue its leadership in the construction equipment sector with the biggest research center in Korea.
Last week, Doosan Infracore completed a 13 billion won machine tools research center to secure a bridgehead in the machine tools market when the economy recovers.
It also said it is targeting 2.2 trillion in annual machine tools sales by 2012. Doosan Infracore ― the world's No. 7 construction equipment maker by sales ― expects to achieve this year's machine tools sales target of 1.089 trillion won, up 18 percent from a year ago.
Infracore, which earns more than 40 percent of its total sales in construction equipment, also produces forklifts, excavators, engines and defense products such as armored vehicles and antiaircraft guns.
Doosan Heavy Industries & Construction owns 39 percent of Infracore.
"We are on a bumpy road for the time being. But our shown and ongoing consistencies towards increased transparency and financial structure will finally work," Shin said.