Doosan expected to retain Bobcat by selling Infracore

A pedestrian walks past the logo of Doosan Group set up outside its head office in downtown Seoul, Tuesday. Yonhap

By Nam Hyun-woo

Doosan Group may have put its stake in Doosan Infracore up for sale, as part of the heavy industry conglomerate's bid to restructure units and salvage ailing flagship subsidiary Doosan Heavy Industries & Construction.

The suspected move is interpreted as the group's strong intention to keep cash-cow Doosan Bobcat under its control, and use the construction equipment firm to help Doosan Heavy normalize its financial status.

Reports said Doosan Group has selected Credit Suisse as the lead manager for the sale of Doosan Infracore's 36.27 percent stake held by Doosan Heavy. However, Doosan Infracore's 51 percent stake in Doosan Bobcat wasn't included in the sale plan Doosan submitted to its creditors, according to reports.

Officials at Doosan Group, Doosan Heavy and Doosan Infracore declined to confirm these details, but added that the group and Doosan Heavy's creditors are looking into all available options.

Doosan Heavy is suffering from massive debts with the group affiliate scheduled to repay 4.2 trillion won ($3.48 billion) by the end of this year. To address this, Doosan Group has filed for a bailout from state-run banks including Korea Development Bank (KDB) and Export-Import Bank of Korea (Eximbank), and the lenders have decided to extend 3.6 trillion won of loans and other financial support. The group earlier told creditors it would raise at least 3 trillion won by selling its non-core assets and subsidiaries.

On deciding which subsidiaries to sell off, the creditors and Doosan Group have been locking horns over selling the group's Bobcat stake, as creditors are pressuring the group to unload the profitable unit while Doosan wants to retain it given its growth potential.

Infracore and Bobcat are both construction equipment firms, but the former has been relatively sidelined in the discussion of restructuring, because of questions on the company's value and outstanding loans.

The 36.27 percent stake in Infracore is valued at around 800 billion won, given its market cap of 1.24 trillion won and that it is a controlling stake in the company. This, however, may not be enough for Doosan Group to secure 3 trillion won, because it is struggling to meet its desired prices on other subsidiaries that have been put up for sale.

Outstanding loans and collateral are also lowering the attractiveness of Infracore. At the end of the first quarter, Infracore's outstanding loans amounted to 2.9 trillion won, which is 12 times the company's 244.2 billion won operating profit expected for this year.

The company offered nearly 99 percent of its 51 percent stake in Bobcat as collateral and secured loans worth 984 billion won ― 600 million in dollars and 260 billion in won. This means the potential buyer of Infracore has to shoulder an enormous amount of outstanding loans, while buying Bobcat alone is relatively burdensome.

Because of this, analysts said Infracore's sale will likely take place after the company is spun off into a business that is up for sale and an investment firm that will hold its loans and the Bobcat stake.

"If there's a sale, it is assumed Infracore will go through a spinoff into a business firm and an investment firm," Daishin Securities analyst Lee Dong-heon said. "The business firm can be sold while the investment firm can be merged into Doosan Heavy. Through this, the earnings from Bobcat can contribute directly to the normalization of Doosan Heavy."

Doosan Infracore's DX800LC excavator / Courtesy of Doosan Infracore

However, other analysts said this will not be an easy path, citing other reasons hampering Infracore's sale.

"Bobcat's contribution into Infracore's consolidated operating profit in construction equipment last year accounted for 62.9 percent, meaning a spinoff will lower the attractiveness of Infracore," KB Securities analyst Chung Dong-ik said.

"Along with its outstanding loans, Infracore is currently in a 719.6 billion won legal battle over its Chinese subsidiaries, which is an excessive risk compared to the anticipated price for the company."

Infracore's business portfolio is also dragging down its smooth sale, because some of the company's business is prevented from overseas sale due to national security.

Due to these setbacks and complicated processes, Doosan Group's apparent decision to sell Infracore shows the group's view that Bobcat is necessary for its survival in the future.

Bobcat logged 1.06 trillion won in sales and 86.8 billion won in operating profit in the first quarter of this year, down 10.67 percent and 44.6 percent from a year earlier, respectively. This is largely attributable to the COVID-19 pandemic, and analysts expect sharper declines will be observed in the second quarter because the company's main market of the U.S. and Europe were heavily affected by the coronavirus in the second quarter.

Despite the gloomy short-term outlook, the company is acknowledged to have growth potential as it can benefit from the anticipated massive infrastructure investments in China and the U.S. after COVID-19.

Currently, Hyundai Heavy Industries is mentioned to be interested in Doosan Infracore, because it also has construction equipment unit, but chances are not high because the shipbuilder has already made hefty investments in acquiring its rival shipbuilder, Daewoo Shipbuilding & Marine Engineering.