Korea Aerospace Sale May Fail After Only Drawing Korean Air

Korea Aerospace Industries Ltd. (047810) shareholders only drew interest from Korean Air Lines Co. as they seek to sell a 1.1 trillion won ($970 million) stake, threatening to derail the process.

The shareholders extended a registration deadline until Aug. 31 from today as they seek another potential bidder, said an official at state-run Korea Finance Corp., who declined to be identified citing company policy. They will decide whether to proceed after that, he said. At least two bids are needed because of rules governing sales by government entities.

Concerns about the impact of a looming presidential election may have deterred bidders even as North Korea’s militarization and rising defense spending in emerging markets spur demand for Korea Aerospace’s helicopters and T-50 trainers jets, said Justin Lee, a Seoul-based analyst at Nomura Holdings Inc. The government last month didn’t get any bids for a stake in Woori Finance Holdings Co. (053000), the country’s biggest financial services group by assets.

“Extending the deadline won’t change the picture,” Lee said. “The political situation will continue to be a burden for the deal.”

About 1,600 workers also protested against the sale outside Korea Finance’s offices today in Seoul, according to the planemaker’s biggest union.

Korean Air

Korean Air said it had registered its interest as it tries to expand its aerospace business. The company, which already makes parts for Airbus SAS and Boeing Co., didn’t say how much it would offer for the Korea Aerospace stake. The sale is being managed by Korea Development Bank and Credit Suisse AG.

Bidders still have until Aug. 31 to make formal offers, Korea Finance said. The company is offering part of its 26 percent stake in Sacheon-based Korea Aerospace in the sale. It plans to remain the second-biggest shareholder. Hyundai Motor Co. (005380), Samsung Techwin Co. and Doosan Group are each looking to offload 10 percent holdings. The planemaker has a market value of $2.37 billion, according to data compiled by Bloomberg.

The planemaker advanced 1.1 percent to close at 27,550 won in Seoul. Korean Air fell 0.6 percent to 50,300 won.

Lawmakers have objected to the sale because of concerns about transparency. Korea Finance is acting “hastily” and placing the planemaker under private control may weaken public accountability, Chyung Ho Joon of the Democratic United Party said during a July 30 meeting of the National Policy Committee, a parliamentary body that oversees Korea Finance and other agencies.

Kim Jung Hoon of the ruling New Frontier Party also said at the same meeting that the current administration shouldn’t rush the sale. His colleague Park Geun Hye is leading opinion polls ahead of the December election. President Lee Myung Bak will end his five-year term in February.

Failed Attempt

Korean Air has previously been unsuccessful in buying a stake in Korea Aerospace. The company abandoned a three-year- long attempt to gain control of the planemaker in 2006 because of a lack of progress. The airline generates 3.3 percent of revenue making plane parts

Korea Aerospace has a limited pool of potential bidders because national-security rules mandate that it remains under local ownership. The South Korean military accounted for 57 percent of the company’s 1.29 trillion won sales last year.

The company also requires continued investment in order to churn out new high-technology products, which may damp interest, Lee said.

“Even without considering a potential political backlash, I don’t know if there would have been enough interest,” he said. “Whoever ends up buying the company will have to be able to meet continuous capital-expenditure needs.”

Spending Plans

Korea Aerospace plans to spend 245.4 billion won this year, including construction of a new plant that will make wing components for Airbus A320 planes under a record $1.2 billion deal signed in March. The company also supplies Boeing.

The Korean planemaker is separately working on the nation’s first heavy fighter, after developing the KUH-Surion helicopter with Eurocopter. Next year, it will begin making the FA-50, a light combat fighter based on the T-50, which will be supplied to the South Korean air force.

“Fundamentally, this company has a stable earnings structure, with most of its revenue coming from the military,” said Paul Hah, an analyst at Woori Investment & Securities Co. in Seoul. “Overseas sales are also looking promising.”

U.S. Contest

The company is set to bid for a $15 billion contract to supply training jets to the U.S. The bid is in partnership with Lockheed Martin Corp., which helped develop the T-50. Talks on selling the trainers to Iraq and the Philippines are also under way after the company won its first overseas order, from Indonesia, last year. The company lost out on an Israeli order to Finmeccanica SpA in February.

The Korean company said in February that total orders this year may more than double to 5.45 trillion won. Second-quarter net income increased 27 percent to 44.1 billion won and sales rose 6.6 percent to 395.5 billion won.

“Political factors are weighing down on this deal,” said Hana Daetoo Securities Co. analyst Thomas Lee. “Excluding that, this is a company many would be interested in.”

To contact the reporters on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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