Is winner’s curse haunting victorious CJ Group?
Huge premium, CEO risk among problems
By Kim Da-ye
CJ Group has successfully outbid a consortium led by steel giant POSCO and Samsung SDS for a major stake in Korea’s largest logistics firm Korea Express, but the market apparently isn’t convinced it was a victory.
The conglomerate’s shares fell 9.88 percent Tuesday on the prospect CJ could be chosen as the preferred bidder for the acquisition of Korea Express, and recovered a mere 0.55 percent Wednesday.
The main doubts raised by analysts and investors are related to the too-high price and a lack of synergy between the two companies.
According to various analysts’ reports, CJ proposed 215,000 won per share, and acquiring a 45 percent stake, a 37.6 percent belonging to Asiana Airlines and Daewoo Engineering & Construction (E&C) and the rest held by financial investors, would cost the firm 2.2 trillion won.
The total bidding price is more than the already high 1.96 trillion won proposed by the POSCO-Samsung consortium and 94 percent higher than Korea Express’ closing price on June 28.
CJ is projected to have generated 289 billion won in sales and 222 billion won in operating profit last year.
The deal will be financed by CJ Cheiljedang, and CJ GLS, its own logistics unit. CJ cannot directly finance the deal because the law prohibits a holding company sharing a stake with its subsidiary. Instead, it is likely to finance CJ GLS’s paid-in capital raising.
CJ Group has a 3.2 percent stake in Samsung Life Insurance worth 630 billion won, with which it tries to borrow money.
While securing the 2.2 trillion won poses high financial risks for the company, the market isn’t sure if the deal will reap high returns.
“CJ Group already has a logistics arm, CJ GLS, so there is, in fact, no synergy effect created between CJ Cheiljedang and Korea Express,” Park Jong-rok, an analyst at Hanwha Securities, said in his Wednesday report.
“CJ Cheiljedang initially wanted to use the cash and the profits from selling Samsung Life Insurance shares in acquiring foreign food manufacturers and expanding its overseas facilities to become a global food company. That plan will see considerable disruption,” Park added.
Another risk is the resistance from the labor union of Korea Express which vowed to go on strike to stop CJ from acquiring their company.
The labor union reasoned that the high bidding price would later pose a burden on Korea Express and its employees and that they fear that a potential restructuring of the firm would leave their jobs unstable.
CJ said in a press conference Wednesday that there won’t be a restructuring of the logistics firm.
CEO risk
CJ hasn’t enjoyed positive coverage recently with its business practices and management under scrutiny.
Earlier this month the Fair Trade Commission (FTC) hit affiliate CJ Cheiljedang with a 340-million-won fine for obstructing the authority’s investigation into the firm’s wheat flour sales.
Back in January during the FTC’s raid, the company hid an external hard disk containing key information about its wheat flour products and deleted more than 170 files related to its review of the change of price.
The bidding process also tainted the reputation of management as Samsung SDS joining the bid was interpreted by some media as Samsung Electronics Chairman Lee Kun-hee trying to hold back his nephew Lee Jae-hyun, chairman of CJ Group.
On Tuesday, the group abruptly changed its public relations chief after he made critical remarks about the Samsung Group.
It’s not the first time Lee Jae-hyun has come under the spotlight. Back in 2008, he was involved in a slush fund scandal in which a staff member allegedly managed his money and lent it privately.