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| An artist's impression of an apartment complex that GS Engineering & Construction is building in Heukseok-dong, Seoul / Courtesy of GS E&C |
By Nam Hyun-woo, Kim Yoo-chul
Hyundai Heavy Industries (HHI), the country's leading shipbuilder, is "seriously reviewing" the possibility of buying a controlling stake in Doosan Infracore as the acquisition will help it expand its presence in the lucrative construction equipment segment.
Industry sources familiar with the matter said they expect a consortium including HHI Holdings and Korea Development Bank (KDB) Investment to be chosen as the preferred negotiator for a controlling 36.07 percent stake in Doosan Infracore, currently held by Doosan Heavy Industries and Construction. KDB Investment was established last year as an investment arm of the state-run lender.
The estimated value of the stake is estimated at 900 billion won including a control premium. "Given financing plans, estimated synergy and future management plans, Doosan creditors led by the KDB will choose the HHI-KDB consortium as the exclusive and preferred negotiator for the sale," an industry executive said.
HHI representatives confirmed that it submitted a letter of intent (LOI) for the acquisition of Doosan Infracore and will announce additional specifics regarding the acquisition of the stake once the preferred negotiator has been announced. The global construction machinery equipment market is led by CaterPillar of the United States with a 16.2 percent share, followed by Komatsu of Japan with 11.5 percent and Volvo with 4.6 percent. The acquisition will help HHI raise its share in the segment to 4.5 percent as Doosan and HHI's share was 3.3 percent and 1.2 percent, each.
A number of entities that had joined the preliminary bidding have withdrawn, including a GS E&C―Dominus Investment consortium, MBK Partners and Glenwood Private Equity.
Possible DICC problems
Initially, the deal was anticipated to be a neck-and-neck race between HHI and GS E&C, as each of them were expecting the construction equipment business to bring synergy to their existing operations. But GS E&C's absence in the final bidding came as a surprise to industry officials, because it has been aggressively adding new businesses to its portfolio this year.
GS E&C's departure from the bidding process seems to have been due to pending lawsuits involving Doosan Infracore's Chinese subsidiary, Doosan Infracore China Co. (DICC).
DICC is now in legal battles with a number of its investors ― IMM PE, Mirae Asset and Hana Financial Investment PE. The investors have the right to force Doosan Infracore to join them and sell up to 80 percent of the DICC stake because DICC failed to go public within three years of their investment in 2011.
The initial public offering (IPO) failed to materialize, and the subsequent DICC sale was also botched. The investors claimed the sale was disrupted because Doosan Infracore did not share relevant data, and filed two suits worth at least 709 billion won against Doosan Infracore. Given the interest and legal fees, the buyer of Doosan Infracore would have to pay up to 1 trillion won.
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| A Hyundai Heavy Industries dockyard in Ulsan / Courtesy of Hyundai Heavy Industries |
From HHI's standpoint, a partnership with KDB Investment will be a huge plus as the KDB is one of the main creditors of Doosan Heavy, and it is under a bailout program led by the bank. As part of the program, not only Doosan Heavy but also its parent Doosan Group sold a number of assets, and the sale of Doosan Infracore will likely be the last step in the program.
"Hyundai Heavy Industries Group is yet to close a massive deal of acquiring Daewoo Shipbuilding & Marine Engineering (DSME), and it is making bids for Doosan Infracore too. Because running two deals at the same time will be a great burden, the chances of Hyundai Heavy acquiring Doosan Infracore seemed slim initially. Then it partnered with KDB Investment and became the strongest contender," a private equity fund official said.
"With Hyundai Heavy teaming up with KDB, other bidders seemed to be discouraged, as they have the strong impression that the buyer has already been selected by the seller."
