Kumho Asiana Suffers Indigestion After M&As
By Yoon Ja-young
Staff Reporter
Kumho Asiana Group, which increased its bulk through a series of mergers and acquisitions (M&A) over the past few years, is now suffering indigestion following its gluttony. The group subsidiaries' share prices are plunging on growing concerns over the huge debt incurred while taking over businesses. The group, however, said the worst-case scenario is unlikely to be realized.
Few Seoul stocks were safe from the market plunge since last autumn as the main index KOSPI dropped from over 2,000 to around 1,500. However, there seems to be something more than the sluggish stock market behind freefalling Kumho Asiana.
The shares of Kumho Industrial, which acquired the country's top builder Daewoo Engineering & Construction at the end of 2006, had share prices soar to around 88,000 won last October on news that it would turn into the holding company of the group. The shares, however, are now trading at around 21,000 won.
Daewoo Engineering & Construction also nose-dived to below 11,000 won from 33,000 won, and the stock price of Asiana Airlines, which ambitiously moved to the main bourse from the junior Kosdaq market, has halved compared to last autumn.
The fall of Kumho Asiana is notable when considering the group was one of the biggest winners in the M&A market over the last few years. It rose to the top of the construction and logistics industry by acquiring Daewoo for around 6 trillion won and Korea Express for 4 trillion won under the strong leadership of Chairman Park Sam-koo, often referred to as ``the man with the Midas touch.'' However, swallowing the big fish pushed up the debt ratio of group subsidiaries. The bearish stock market is making investors pay more attention to stability than growth potential.
According to chaebul.com, an online information provider on conglomerates, the total debt of Kumho Asiana Group was 22.2 trillion won at the end of March this year, growing 96.4 percent from three years ago.
Investors are especially showing concern over the put back option Kumho gave investors while acquiring Daewoo. Kumho Industrial promised to buy back shares from investors if the share price of the builder remained below 32,000 won by December 2009. If Daewoo shares remain sluggish, the group will need over 4 trillion won to buy back 120 million shares held by investors.
``In the case of Daewoo Engineering & Construction, the buyback provision is adding to the financial burden on Kumho Asiana. It is one of the factors which drove Daewoo shares to under perform compared with other construction shares after completion of the M&A,'' said Lee Jae-won, an analyst at Tong Yang Investment Bank. Lee said the financial burden on the buyer firm could weaken long-term potential for investment, and hurt synergy effects between the buyer and the firm taken over.
Kumho Asiana Group, however, said the market is overreacting. ``When considering the whole group, it has more than enough cash assets ― 5 trillion won. There is no problem even in a worst-case scenario, which is very unlikely to happen,'' said an investor relations officer at the group.
He said the first-quarter performance, which fell below the market consensus, coupled with the unstable market pulled down stock prices even further. He emphasized that there still is plenty of time until December 2009 ― stock prices can rebound anytime before then. ``We are trying to strengthen shareholder value, buying back shares and paying dividends, and also bolster sales. We believe that the Daewoo Engineering & Construction shares will stop undershooting after the earning season.''