Oct. 15 (Bloomberg) -- LG Group, South Korea's second-largest business group, and Carlyle Group Inc. made a 1.5 trillion won ($1.3 billion) takeover offer for Hanaro Telecom Inc., challenging a bid by American International Group Inc. and Newbridge Capital Ltd.

LG and Carlyle plan to arrange loans and spend 736 billion won on new shares to gain a 51 percent stake. Combining Hanaro, South Korea's No. 2 high-speed Internet service provider, with LG units will create a ``group with all the elements to become the leading telecommunications provider in Korea,'' Michael Kim, Carlyle's Korea president, told reporters in Seoul.

Hanaro needs to reduce its 952 billion won of short-term debt and invest more to catch up with KT Corp., which holds about 50 percent of the market compared to Hanaro's 27 percent. LG is turning to Carlyle, a Washington-based private equity fund, for funds as the nation's mobile phone and Internet companies seek alliances to trim costs.

``LG seems to be mainly concerned about the threat of their losing control of Hanaro,'' said Lee Jae Hyun, who manages 420 billion won of assets at KEB Commerz Investment Trust Management Co. in Seoul. ``I'm not really sure about whether LG has a clear plan on how to save Hanaro.''

Carlyle and LG's offer includes a $700 million syndicated loan arranged by adviser Citigroup Inc. LG said it has secured backing from shareholders of more than 20 percent of Hanaro

LG, Hanaro's biggest shareholder with an 18.1 percent stake, wants to combine Hanaro with units such as Dacom Corp., the country's second-largest long-distance phone carrier, LG Telecom Co., the No. 3 cell phone company, and Powercomm Co., which operates data networks.

``Everyone knows that if Hanaro, Dacom and Powercomm continue to compete, then it will be hard for any of them to survive,'' Jung Il Jae, a vice president at LG Corp., the holding company for LG Group, told reporters.

The bid for new stock of 3,400 won is 6 percent higher than the rival bid, Jung Hong Shik, LG's chief of telecommunications, said in Seoul. Newbridge said the LG offer doesn't provide shareholders with a full 6 percent premium on their bid as it would include a larger dilution of the company's stock.

The new offer ``is an unrealistic plan with no guarantee of making good on the conditions of fulfillment,'' said Park Byung Moo, president of Newbridge Capital Korea. He said the proposal ``is uncertain and may take months,'' while Hanaro needs about 300 billion won by the end of the year to repay debt.

American International Group and Newbridge agreed to pay $500 million for new shares and organize a $600 million syndicate loan for the company. Park said the money would be delivered to the company the day after shareholders approve their offer.

Survival

LG is making a last bid to stop the offer before a shareholders' meeting on Oct. 21. Carlyle will buy 429 billion won of the Hanaro shares, with the remainder to be acquired by LG, which will spend 200 billion won and swap stock in Dacom for the shares. LG owns 30.1 percent of Dacom.

Hanaro had 952 billion won of short-term debt as of June 30 and hasn't made a profit since 1998.

Hanaro and its larger rival KT have made South Korea the highest concentration of high-speed Internet use in the world after installing broadband connections in two thirds of the country's 17 million households.

Hanaro shares were up 1.4 percent at 3,740 won as of 12:30 p.m. in Seoul. They rose as much as 3.5 percent after surging 10.6 percent yesterday. LG Corp. shares fell 2.7 percent to 9,300.

Last Updated: October 15, 2003 00:34 EDT