By Kim Yoo-chul
LG Chem, the nation's biggest chemical company, may be moving to purchase Woongjin Chemical, the chemical arm of the troubled Woongjin Group to strengthen its petrochemical business.
"LG Chem is mulling acquiring Woongjin Chemical. But nothing has been decided yet," LG said in a filing to the Korea Exchange (KRX), Tuesday.
Considering LG's conservative stance toward big deals, the move came as a surprise. LG Group has so far been interested in small deals.
Woongjin is engaged in the production and supply of polyester fibers and related products. Shares of Woongjin Chemical are currently suspended from trading due to ongoing share consolidation.
"Under the new CEO, the LG Group affiliate has been consistent in strengthening its traditionally-strong petrochemical business as CEO Park Jin-soo wants to transform LG Chem into a firm that can consistently generate profit regardless of the market situation," said an official at one of LG's affiliates.
LG hired Samil PwC as its accounting advisor and Lee & Ko for legal services, said sources in the local investment bank (IB) industry. Spokesman C.S. Song declined to confirm this.
"LG has been passive in large M&A deals. But LG Chem believes the Woongjin deal will pave the way to boost growth. That's why LG is hiring legal and financial advisors, although no details about the deal are currently available," the sources said.
Korea Investment and Woori Investment are said to be the lead managers of the deal that is expected to start from next month.
LG is the latest company to indicate an interest in buying Woongjin after Toray, Hubis, GS Group, Hyosung Group, Cheil Industries, TK Chemical and Kolon Group.
Local fund managers and stock market analysts say LG needs to diversify its business portfolios within its existing business structure.
They also stressed that the acquisition won't threaten LG's financial soundness as Woongjin is capable of generating consistent profit.
"Out of the total annual corporate profit, its petrochemical business made up over 75 percent. LG can use Woongjin's patents in next-generation fibers. The two are within the same industry category," said Kim Il-tae, senior fund manager at Taurus Investment, advising its clients to buy more LG Chem-related stocks.
Woongjin Chemical reported 28.4 billion won in operating profit last year out of 1.11 trillion won in annual revenue. It has competitiveness in fiber-related markets, in which LG Chem isn't involved.
LG Chem's cash-equivalent assets reached over 720 billion won as of the end of last year, which is enough to thwart other potential bidders except for Cheil, Kim said.
Woori Investment expects LG Chem to report 24 trillion won in revenue this year with an operating profit of 2.05 trillion won, bolstered by a better product mix and a steady growth in its high-end products.