Tuesday’s announcement that Hyundai Development Company is the preferred bidder for a controlling stake in South Korea’s Asiana Airlines brings one of the country’s most talked-about recent acquisitions closer to completion.
Hyundai leads a consortium, alongside brokerage Mirae Asset Daewoo, which offered KRW2.5 trillion ($2.15 billion) for a combination of the 31.05% stake held by top shareholder Kumho Industrial, plus new shares to be issued by Asiana.
They beat a rival bid from a group led by Aekyung, which owns budget airline Jeju Air, which is reported to have bid KRW2 trillion, though Euromoney has not been able to confirm this.
The sale of Asiana has attracted widespread attention in Seoul, perhaps because airlines carry a curious sense of national identity and because pretty much every consumer is familiar with them.
However, there’s more to it than that: it’s a deal rich with sub-plots.
The sale has been forced upon the Kumho group, historically one of South Korea’s leading chaebols with interests across automotive, logistics, industrial and chemical sectors, among others.
After the Asian financial crisis, Kumho was one of the strongest conglomerates in the country, but it used its financial strength of the time unwisely, buying Daewoo Engineering & Construction, which was laden with debt.
The global financial crisis hit the construction arm especially badly, and the past 10 years have been characterized by workouts and asset sales.
That work continues, and Kumho’s main creditor bank, Korea Development Bank, has pushed it to sell its stake in Asiana.
It is a tough sell for Kumho, because it has a resonant emotional history.
Kumho was founded by Park In-chon in Gwangju, initially as a taxi service. Gwangju suffered considerably after South Korea’s coup d’état in 1979, when president Park Chung-hee was assassinated and replaced by Chun Doo-hwan. Demonstrations were violently put down by the military, leading to what is known as the Gwangju Uprising in May 1980, in which hundreds of civilians were killed.
There were many years of recrimination – Chun himself would later be sentenced to death for his role in the massacre, though he was pardoned.
It was with this sense of injustice in mind that when the government decided to issue a second aviation licence alongside the Korean Air monopoly in 1988, a business group from Gwangju was selected – Kumho.
“There’s a sentimental history to this,” says one Korean familiar with the background.
Shareholder activists may well look at this and think that nothing has changed, despite widespread claims of chaebol reform
Although it will be a wrench to sell such an asset, there is some solace to be found in the fact that Mirae’s founder, Park Hyeon-joo, is also from Gwangju.
Park is thought to be the driver behind the deal and might have sought more than the 20% stake Mirae took were it not for a law prohibiting non-financial institutions from owning financial institutions.
Heart-warming though that may be, what’s an asset management group doing buying an airline? It is understood Mirae is keen to get into aircraft financing. In any event, the main stake will be held by Hyundai Development Company.
Between them, they do seem to have come in with a notably high bid. Even if the reported Aekyung KRW2 trillion bid is correct, Hyundai/Mirae outbid it by half a trillion won.
However, that’s a slight red herring, because the bid is not just for the Kumho stake but for new shares as well. From an M&A perspective, this is interesting: Hyundai/Mirae are effectively recapitalizing the company at the same time as buying it.
The logic appears to be that the airline is going to need a cash infusion anyway – if you’ve flown it recently, this is clearly the case – and putting that money in the up-front bid ensured they’d also have the highest offer while also making a head start on transferring capital to it.
It’s a sensible time to take the funding hit up front, given that the cost of borrowing is so low.
The asset going to the Hyundai group appears to show that the chaebol model is alive and well in South Korea, at odds with the streamlining of conglomerates to core businesses that one sees today in Japan. Shareholder activists may well look at this and think that nothing has changed, despite widespread claims of chaebol reform.
Still, Hyundai is a strong force and there are some synergies with other elements of the group.
Hyundai today refers to a range of different enterprises, with the original Hyundai Group including things such as shipping, welding, real estate and civil engineering. Businesses such as Hyundai Motor Group, Hyundai Heavy Industries Group and Hyundai Department Store Group are all separate, free-standing organizations now.
So, too, is Hyundai Development Company, the one buying Asiana: its other interests include construction, civil engineering, petrochemicals, plastics and lighting, which hardly seem natural bed-fellows for an airline, but we’ve seen worse.
The government is thought to be happy enough: the airline, something of a national ambassador as all airlines are, goes to a company strong enough to invest in it, and the Gwangju connection means it won’t lose votes there because it can argue it kept the airline at least partly linked to the city.
It’s also another win for Credit Suisse, which has been helping Kumho buy and sell things for more than a decade now. It advised it on buying Daewoo Engineering & Construction and Daehan Tongwoon, then helped it sell them again after the global financial crisis.
Last year, Credit Suisse helped it sell Kumho Tire to Doublestar Tyre from China. And it is the sell-side adviser on the Asiana sale, too.
There’s good business to be had from the chaebol.