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Daewoo E&C has few takers

Potential Korean buyers are concerned about ‘winner’s curse’
Oct 21,2017
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Daewoo Engineering & Construction, which has had a tumultuous history of bouncing from owner to owner, is now up for grabs again, but there appear to be few takers as the price tag remains high while demand for construction is in decline.

Korea Development Bank, the construction company’s main creditor, posted a sale notice last week of its 50.75 percent stake in Daewoo E&C, but prospects for a sell-off remain uncertain. Based on the current share price, the stake is expected to be valued at around 1.5 trillion won ($1.3 billion), a fairly high sell.

On top of that, the market expects the bank to add premiums to the management rights, in which case the price could go up to 2 trillion won, still lower than what Korea Development Bank put down for Daewoo when it acquired the company from cash-strapped Kumho Asiana Group as part of its restructuring efforts.

Despite the anticipated loss, the bank is determined to sell off the construction company. “If a suitable bidder appears, we can sell Daewoo at market price regardless of its book value,” a source at Korea Development Bank said.

Mirae Asset Daewoo and Bank of America Merrill Lynch will advise the sale and be accepting letters of intent through Nov. 13.

Daewoo E&C is among Korea’s top builders. Last year, the company made combined sales of 11 trillion won and since 2010 has built the most number of private residential homes.

Because of the high price, analysts believe foreign buyers might be more interested than small local investors. Rumored bidders include Saudi Arabia’s national petroleum and gas company, Saudi Aramco, and Petronas, a Malaysian oil company. Potential Korean bidders include Hoban Construction and Booyoung, two midsize builders with strong cash flows, though the companies have denied the speculation.

The lukewarm response might stem from fear that the high price could threaten the buyer’s liquidity, a phenomenon known as the winner’s curse. When Kumho Asiana purchased Daewoo E&C in 2006, the acquisition sunk the company into debt. Three years later, reeling from the impact of the global financial crisis, Kumho Asiana filed for a debt workout program, and Korea Development Bank took over management control of Daewoo E&C.

“It is unlikely that local companies will buy Daewoo,” a source in the construction industry said, “because there are concerns that a large-scale takeover could plunge the company into a liquidity crunch.”

The market conditions are also unfavorable, with Chinese competitors landing many overseas projects. In 2012, 42 percent of Daewoo E&C’s business came from outside the country, but that has since declined to 31 percent last year. Meanwhile at home, the Korean government is trying to cool an overheated real estate market and limiting construction projects.

And if Korea Development Bank sells Daewoo E&C at too low a price, the labor union is bound to protest. “There shouldn’t be a case where an uncompetitive company acquires Daewoo E&C only to expand its size,” the union said in a statement.


BY HWANG EUI-YOUNG, PARK EUN-JEE [park.eunjee@joongang.co.kr]