Daewoo Construction Could Go to Foreign Buyer

Daewoo Engineering and Construction is likely to be the first major Korean builder to be sold to a foreign fund.

Three out of the four preferred bidders for the company are foreign funds and they have offered higher bids than the lone Korean contestant. The creditors committee is also positive over the development plan offered by the foreign funds.

The domestic construction industry, however, is fearful over possible changes if

Daewoo is sold to a foreign fund. Certain voices in the financial and construction sectors say the sale of Daewoo Engineering is inevitable but it could be too early to sell the country’s No. 3 construction company to an unproven foreign fund.

○ Middle Eastern fund emerges as dark horse

The short list of preferred bidders selected by the Kumho Asiana Group for the sale of Daewoo Engineering includes one American and two Middle Eastern funds and one strategic investor related to domestic capital. The Blackstone Group, the world’s largest private equity fund, was not included contrary to expectations.

Kumho said it selected four “domestic and foreign” investors, but the financial industry expects the Korean fund will not be selected as a preferred bidder given the tendency and long-term vision of the capital.

Min Yoo-seong, president of Daewoo’s main creditor Korea Development Bank, also said, “(Daewoo) will likely be sold to a foreign company.”

Among the bidders, a Middle Eastern fund is highly likely to acquire Daewoo. A financial industry source said, “Since the Middle Eastern fund proposed a bid higher than 20,000 won (17.1 U.S. dollars) per share and is the equivalent of a sovereign wealth fund that tends to invest long term, it is likely to be interested in developing the company after acquisition.”

○ Kumho’s liquidity problem

If Kumho sells its 50-percent stake in Daewoo at 23,000 won (19.7 dollars) per share, it will earn 3.7 trillion won (3.1 billion dollars). By doing so, it can prepare the four trillion won (3.44 billion dollars) necessary to hand out to its investors according to the put-back option it signed with investors when it acquired Daewoo in 2006.

Kumho must sell Daewoo as soon as possible to solve its liquidity problem, but the construction industry fears that Daewoo’s value will drop significantly if it is once again handed over to a foreign fund following the prior acquisition that dealt a severe blow to Daewoo.

If a foreign buyer gets Daewoo for a short-term goal, lays off staff, sells assets, and puts it on sale again, Daewoo’s management system will see a significant shakeup.

Others, however, say that if a foreign fund acquires Daewoo, it will facilitate the entry of foreign competition and allow Korean companies to expand their horizons.

legman@donga.com aryssong@donga.com