By Kim Yoo-chul
Doosan Engineering and Construction (E&C) said Tuesday that it has decided to acquire Doosan Mecatec through a share swap, a move that many believe will ease its cash shortage and pave the way to diversify its business portfolio.
The construction firm said that its board of directors (BOD) has approved the plan to merge with Doosan Mecatec, a leading global chemical process equipment manufacturer and a subsidiary of Doosan Heavy Industries.
In the merger, one Mecatec share will be swapped for 4.13 Doosan E&C shares.
"We will hold a shareholders' meeting sometime in September and finalize the deal in November," said a spokesman at Doosan E&C.
"We expect the acquisition to enhance corporate value, improve profitability and maximize shareholder value," he added.
The market welcomed the news, with Doosan Engineering shares soaring to the daily limit of 15 percent.
"Doosan Mecatec has a stable cash flow structure as it specializes in the profitable plant-related fields, which will help Doosan E&C, whose business depends heavily on business cycle due to its exposure to the volatile real estate market. I think this merger is a good solution," said Kim Hong-kyun, an analyst at Dongbu Securities.
The decision came after Doosan E&C was grappling with deteriorating balance sheets due to rising debt ratios amid the sluggish property market. Debt ratios at Doosan E&C spiked to 299 percent in June from 185 percent at the end of 2008.
"Doosan E&C has secured 700 billion won worth of cash-equalized assets via the acquisition, helping the construction affiliate lower the debt ratio below 190 percent in 2011," the spokesman added.
Doosan E&C aims to become a top-tier infrastructure and plant-focused construction player with an annual sale of 5 trillion won in 2013 and the absorption will pave the way for it to achieve the goal.
"Diversification looks impressive, particularly as the domestic real estate market is stalling. Doosan E&C is expected to create a synergy in plant businesses," said Baek Jae-wook, an analyst at KTB Securities.
Thanks to the acquisition, the real estate business portion by Doosan E&C will lower 41 percent from the current 64 percent, while that of plant and overseas business portions will rise to 22 percent and 16 percent, respectively, Doosan said.
The Doosan Group's construction unit reported 39.9 billion won in operating profit during the April-June period, an increase of 42.5 percent year-on-year. The quarterly sales were 604.2 billion won ― an increase of 10 percent from a year earlier.
"Doosan E&C shares are still undervalued due to chronic worries over liquidity amid a sluggish local residential property market. Still, it is needed to check cash-flows in the latter half," said Cho Yoon-ho, an analyst at Daishin Securities, adding the local brokerage maintains 6,400 won per share as its target price.
Doosan Heavy Industries will be the biggest shareholder of Doosan E&C, owning 72.8 percent, it said.