Overambitious bet
Can cash-strapped Dongbu afford Daewoo Electronics?
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Kim Jun-ki Dongbu chairman
By Park Si-soo
Dongbu Group, a mid-tier conglomerate, is in final negotiations to take over Korea’s third largest consumer appliance maker Daewoo Electronics. Concrete terms of the deal are expected to be announced in late November but rumor has it that Daewoo is for sale at around 370 billion won ($335 million).
The headquarters of Dongbu Group in Seoul
The group insists the deal, if it goes smoothly, will add a new growth engine to the conglomerate that currently earns a major portion of its revenue from its steelmaking arm Dongbu Steel and financial affiliates Dongbu Insurance and Dongbu Life Insurance. Group Chairman Kim Jun-ki is reportedly ready to use part of his own wealth in the event of a financial short fall for the purchase, indicating Dongbu’s sense of urgency regarding the deal.
“The acquisition of Daewoo will make Dongbu a leading player in the electronics industry,” said Dongbu spokesman Kwon Ki-joo. He said the acquisition was initiated in line with the group’s broad picture of having “three key players” of the electronic industry under one roof, referring to chipmaker Dongbu Hitek, steelmaker Dongbu Steel, and home appliance maker and distributor Daewoo Electronics. “The acquisition will complete the installation of a powerful triangle that will create cost-saving and other synergistic effects,” Kwon said.
Yet many analysts don’t echo the rosy prediction, raising the possibility that the acquisition could deteriorate the already-troubled financial health of the group. They said they are still doubtful over Dongbu’s ability to raise money for the acquisition. It has joined forces with two private equity funds to win the deal, where Dongbu is responsible for raising some 150-180 billion won.
The group has gone through a forced debt-rescheduling program since 2009 under the monitoring of its biggest creditor, Korea Development Bank. The firm’s ratio of debt to assets stands at the alarming level of 370 percent.
Fueling uncertainty is the poor performance of the group’s major affiliates during the last few years. The group’s key affiliates, including Dongbu Steel, Dongbu Engineering and Construction (E&C), and chipmaker Dongbu Hitek, posted staggering net losses last year. Their money-losing performances continued through the first half of this year amid the protracted global economic downturn.
Dongbu Steel recently declared a state of emergency, adopting a variety of cost-saving measures which included a wage reduction by an average of 30 percent until next March.
Worse, the affiliate, which reported 76.6 billion won in net losses last year alone, is now under intense scrutiny by the state anti-trust regulator which suspects the firm and four other domestic steelmakers have colluded with each other for years to rig product prices and supply to the market. Dongbu is expected to face nearly 100 billion won in fines.
Kwon has vehemently denied these, underscoring that the group faces no financial challenges in pushing forward with the deal.
“Our (financial) health is good enough to make the deal done without money from outside, which was confirmed by our creditors,” he said. “Dongbu is a company whose annual sales hover around 3 trillion won. It’s understandable that analysts are skeptical of our fund-raising ability amid financial restructuring, but it’s never burdensome in reality.”
Another question mark against the deal originates from Daewoo Electronics.
Though the company is ranked No. 3 in the domestic home appliance market, its market share is far lower than that of Samsung Electronics and LG Electronics. It justifies the prediction among analysts that synergy effects of an acquisition would be limited.
“It’s hard to predict how much the acquisition would be helpful in boosting sales of Dongbu’s chip and steelmaking affiliates,” said Lee Sang-hun, a senior analyst at HI Investment and Securities.
Insiders said the group is considering installing Daewoo’s TV, refrigerator, washing machine and other home appliances in apartments built by Dongbu E&C as built-in furniture. But real estate experts said the installation of Daewoo products without conducting a consumer survey will only tarnish the brand image of the apartments.
“Builders try to strengthen their brand image with built-in luxurious furniture imported from Italy or other countries. The use of Daewoo products is obviously against this trend, which will hurt Dongbu E&C’s reputation,” a real estate expert said.
Daewoo posted 1.685 trillion in sales last year, up from 1.607 trillion won in 2010. More than 80 percent of sales are generated overseas using extensive marketing networks in 30 countries, including the United States, Europe and as far away as Latin America. Separated from the now-defunct Daewoo Group in 1998, Daewoo Electronics has sought a new owner since 2006. Dongbu is the sixth bidder.