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Hyundai Heavy’s Shareholder Losses Increase With Chaebol Concern: Real M&A

Hyundai Heavy Industries Co.’s interest in acquiring 15 percent of Hynix Semiconductor Inc. (000660) is already costing shareholders more than the stake itself is worth.

Hyundai Heavy, the Ulsan, South Korea-based owner of the world’s largest shipyard, has lost about $3.5 billion in market value since saying last week it may buy a $2.4 billion stake in Hynix, the second-biggest maker of computer memory chips, according to data compiled by Bloomberg. Hyundai Motor Co. (005380), the nation’s largest carmaker, shrank by $1.8 billion after a report it may join Hyundai Heavy to bid for shares owned by creditors that bailed out Hynix in 2001. Both companies denied the report.

A purchase by Hyundai Heavy, which like Hynix’s predecessor was part of the old Hyundai Group, would be driven by a desire to rebuild South Korea’s family owned conglomerates, or “chaebol,” rather than any business rationale, according to Mirae Asset Securities Co. and CLSA Asia-Pacific Markets. The chaebol, which spearheaded the nation’s industrialization in the 1960s, racked up debts in the 1990s that compelled South Korea to turn to the International Monetary Fund for a bailout, leading to calls to reform and rein in the conglomerates.

“It is very difficult to understand the logic as to why a giant shipbuilding and engineering conglomerate such as Hyundai Heavy would want to acquire a stake in Hynix,” said Tony Hann, London-based head of emerging market equities at Blackfriars Asset Management Ltd., which oversees $1 billion and owns about 7,000 Hyundai Heavy shares. “Hyundai Heavy makes all sorts of things, but it certainly doesn’t make semiconductors.”

‘Family Inspired’

“This does seem to be a family inspired move for purposes, which certainly on the face of it, don’t seem to serve minority shareholder interest,” he said. “To fully understand this, you’d need to be a member of the controlling family.”

Lee Si Hyun, a spokeswoman for Icheon, South Korea-based Hynix, declined to comment on potential buyers. Hyundai Heavy said in an e-mailed response on June 10 that it is still considering a bid for Hynix. Hyundai Motor, also in an e-mail, denied any interest in the stake.

A group of nine creditors plans to sell all or part of a 15 percent stake in Hynix that it gained through a government- initiated bailout in 2001 after an industry downturn.

The creditors plan to invite preliminary bids in July, Ryu Jae Han, Chief Executive Officer of Korea Finance Corp., said in a telephone interview on June 10.

They may ask Hynix to sell new stock in addition to part of their combined stake. The creditors aim to close the deal, including payment, by the end of this year, Ryu said.

Interested Parties

“In principle, we are looking at this sale with interest,” Hyundai Heavy said on June 8, without elaborating. The company’s shares have since slumped 10 percent to 444,000 won ($410.10), cutting its market value to $31.2 billion from $34.7 billion, data compiled by Bloomberg show.

Hynix’s creditors, which are trying to recoup the $4.6 billion that they spent bailing out the company, have already failed twice last year to attract any buyers.

Shares of Hyundai Motor have slumped 6.3 percent since Hyundai Heavy’s statement of interest. MoneyToday, an online Korean language news provider, reported on June 9 that Hynix’s creditors suggested the two companies form a consortium to bid for the stake. Hyundai Heavy said the report was groundless, while Hyundai Motor also denied it.

Hyundai Heavy generates 50 percent of its annual revenue from shipbuilding, offshore rigs and drilling platforms, and the rest by selling engine equipment, transformers and construction machinery, data compiled by Bloomberg show.

Deal Rationale

All of Hynix’s sales come from memory semiconductors used in televisions, cameras and mobile phones, the data show.

“Investors clearly don’t understand the rationale behind Hyundai Heavy even considering an acquisition” of a stake in Hynix, said Park Moo Hyun, an analyst at E*Trade Securities Co. in Seoul. “There doesn’t immediately seem to be much synergy.”

Hyundai Heavy and Hyundai Motor were once part of Hyundai Group, South Korea’s largest chaebol until it was split up.

Chaebol were originally modeled on Japan’s zaibatsu conglomerate system, and with the government’s support came to control many of South Korea’s biggest businesses. The Hyundai chaebol traced its roots back to 1947, when Chung Ju Yung started a construction company that eventually grew into a group making cars, ships, semiconductors and steel. Hyundai Motor was founded in 1967, and Hyundai Heavy built its first ship in 1974.

History Lesson

While the chaebol helped transform South Korea into an industrialized economy after the Korean War, they were crippled as the Asian financial crisis in 1997 and 1998 pushed affiliates that borrowed too much money toward insolvency.

Creditors accelerated the breakup of the Hyundai chaebol after seizing control of Hyundai Engineering & Construction Co. in 2001. The Seoul-based contractor was bailed out after losing 2.98 trillion won in 2000, the result of unpaid international contracts and debt obligations it couldn’t meet.

Another conglomerate member, Hyundai Electronics Industries Co., was renamed Hynix in 2001 as it was taken over by creditors.

The chaebol had already begun to unravel after an aging Chung named his fifth son, Chung Mong Hun, as his successor in 2000, inflaming sibling rivalries and prompting some affiliates controlled by the founder’s sons to leave the group. Hyundai Motor broke off that year, while Hyundai Heavy split off in 2002.

Now, Hyundai Heavy’s interest in Hynix is heightening concern that companies formerly part of the Hyundai chaebol are now competing to reassemble the conglomerate by acquiring stakes in each other’s businesses as the expense of shareholders.

Empire Building

“In Korea, M&A is not just driven by business logic,” said Im Jeong Jae, a fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $29 billion and owns shares of Hyundai Heavy. “Chaebol companies sometimes try to buy companies in unrelated areas, and because the interests of majority shareholders, their past relations or other elements are intertwined, there’s a lot of noise.”

In March, Hyundai Motor Group -- comprised of Hyundai Motor, Kia Motors Corp. and Hyundai Mobis -- won the bid for a 35 percent stake in Hyundai Engineering, which builds nuclear power plants and airports. All four companies are based in Seoul.

The contest pitted Hyundai’s automotive group companies against Hyundai Group, currently made up of nine affiliates, including Hyundai Merchant Marine Co. and Hyundai Elevator Co.

Hyundai Group was initially chosen as the preferred bidder in November with a 5.5 trillion won bid, two people familiar with the matter said at the time. The offer was higher than some investors anticipated, causing the group companies to decline.

Korea Discount

Hyundai Merchant Marine of Seoul and Icheon-based Hyundai Elevator, two of Hyundai Group’s publicly traded units, tumbled by 15 percent on Nov. 16.

Hyundai Group’s bid collapsed over concerns about its ability to finance the purchase. Hyundai Motor Group ultimately paid 4.96 trillion won for the stake. The price was about 74 percent higher than the 2.85 trillion won that the stake was worth when the bids were submitted on Nov. 15, the data show.

“Hyundai Engineering is still very fresh on everyone’s mind,” said Byun Sung Jin, an analyst at Mirae Asset in Seoul. “It’s no secret that the main drive behind buying Hyundai Engineering was them wanting to get back what was once part of the Hyundai family.”

Putting family interests ahead of shareholders is one reason why the nation’s companies are valued at a so-called Korea discount, according to Blackfriars Asset’s Hann.

The Kospi index, the benchmark gauge for South Korean common equity, is valued at 9.1 times next year’s earnings, according to data compiled by Bloomberg. That’s the cheapest of 15 Asian equity markets, outside Pakistan, the data show.

“The market takes it seriously because they rightly fear a regression to Korea’s old ways,” said Shaun Cochran, head of Korea research at CLSA Asia-Pacific Markets in Seoul.

To contact the reporters on this story: Mohammed Hadi in Hong Kong at Mhadi1@bloomberg.net; Kyunghee Park in Singapore at kpark3@bloomberg.net; Jun Yang in Seoul at jyang180@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Neil Denslow at +852-2977-6639 or ndenslow@bloomberg.net.

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