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M&A

Sale of Doosan Infracore kicks off; preliminary bidding by Sept. 22

Sep 03, 2020 (Gmt+09:00)

The sale process for Doosan Infracore Co. is under way, with the preliminary bidding deadline for a controlling stake in South Korea's top construction equipment maker set for September 22.

The success of the sale, however, is shrouded in uncertainty given reported price differences between the seller and the potential buyers, alongside caveats concerning an ongoing legal dispute with some financial investors.

According to the investment banking industry, Doosan Group and the sale manager Credit Suisse have sent out information memorandums (IMs) to candidates who in August expressed an initial interest in the 36.27% stake, currently owned by Doosan Heavy Industries & Construction Co., and signed non-disclosure agreements (NDAs).

Doosan excavators

In the information distributed to prospective investors, the group made clear that Doosan Bobcat, owned by Doosan Infracore, will be excluded in the proposed sale this time.

It is widely expected that the group will spin off Doosan Infracore into an operating company and investment company that owns Doosan Bobcat shares and then sell off the operating division, while merging the investment division into Doosan Heavy Industries.

The sale is part of Doosan Group’s efforts to keep cash-strapped Doosan Heavy afloat. The power plant builder Doosan Heavy took a heavy hit when the government announced plans to depart from nuclear and coal power, which had been the company's core businesses.

The value of the 36.27% stake is estimated at around 600 billion won ($505 million) based on Doosan Infracore’s market cap of 1.65 trillion won.

The sale price is expected to start anywhere between 700 billion won and 800 billion won, including a premium for management control. But Doosan Group and its sales manager are looking to receive at least 1 trillion won, citing the construction machine maker’s intrinsic value.

Doosan Infracore, which manufactures and sells construction equipment and engines such as excavators, posted over 1 trillion won in EBITDA in 2019 on a consolidated basis, including Doosan Bobcat’s EBITDA of 600 billion won. The group argues Infracore’s corporate value should top 1 trillion won taking into account similarly rated industry peers’ average EBITDA multiple of 8-9 times.

PEFs FAVOR DOOSAN BOBCAT FOR ACQUISITION

Hyundai Heavy Industries Co., known to be one of the most likely bidders, has said it’s not interested in the Doosan Infracore stake, although the company, together with its M&A advisor, was looking into the machine maker. Another local industry rival Hanwha Group also expressed its lack of interest.

No financial investors and private equity firms have yet emerged for the stake, but market watchers are looking at North Asia-focused private equity firm MBK Partners and local private equity firm Hahn & Company for a possible bid. Some global PEF managers were also known to be considering a bid after receiving IMs from the seller.

“For now, PEFs apparently aren’t much interested in Doosan Infracore. Rather, they are keeping close watch on Doosan Bobcat, which could be put up for sale later,” said a global PEF representative.

Doosan Group acquired Bobcat, a utility equipment business, from US-based industrial equipment company Ingersoll Rand in 2007 for $4.9 billion. It was the largest overseas acquisition at the time – one that pushed Doosan Group into debt.

LAWSUIT BIGGEST STUMBLING BLOCK FOR SALE

The deal’s biggest setback will be Doosan Infracore’s lawsuit with financial investors, including IMM Private Equity.

In 2011, the company raised 380 billion won from financial investors through its China-based unit based on a commitment to go public by April 2014. However, the company was unable to get listed due to poor market conditions. The financial investors filed suit in a Korea court after they failed to exercise their drag-along rights to sell their stake in the company.

The financial investors won the case in a lower court, but lost the second ruling in a higher court. Both sides are awaiting the final ruling from the Supreme Court. Analysts said if the top court rules in favor of the financial investors after the Doosan Infracore sale is completed, the buyer may have to cough up as much as 1 trillion won in compensation.

A successful sale of Doosan Infracore would ease the debt-laden parent group’s self-rescue efforts.

The group has been selling its core assets in return for a state bailout. Its headquarters Doosan Tower, 27-hole golf course Club Mow CC, copper and biomaterial maker Doosan Solus Co. and hydraulic device manufacturer Doosan Corporation Mottrol are either up for grabs or under negotiations for sale.

By Jun Ho Cha and Chae-Yeon Kim

chacha@hankyung.com

In-Soo Nam edited this article

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