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Hyundai Group ‘Spooking’ Investors on Funding Need

Hyundai Group ‘Spooking’ Investors With $4.2 Billion Fund Ne
A file photograph shows Hyun Jeong Eun, Hyundai Group's chairwoman. Her group was yesterday named preferred bidder for a controlling stake in Hyundai Engineering & Construction Co. after offering about 5.5 trillion won, according to two people familiar with the situation. Photographer: Jung Yeon-Je/AFP/Getty Images

Hyundai Group Chairwoman Hyun Jeong Eun may have to raise about 4.8 trillion won ($4.2 billion) by the end of next year after beating her billionaire brother-in-law for control of South Korea’s biggest builder.

Her group was yesterday named preferred bidder for a controlling stake in Hyundai Engineering & Construction Co. after offering about 5.5 trillion won, according to two people familiar with the situation. That’s double the market price and about 4 trillion won more than the cash holdings of Hyundai Group’s three main listed units. Those three companies also have to repay 824.6 billion won of bonds by the end of 2011, according to Bloomberg data.

“The lack of information about how the group is going to raise this money is spooking investors,” said Byun Sung Jin, an analyst at Mirae Asset Securities Co. in Seoul. “And, after paying for the takeover, will it have money to spend on Hyundai Engineering for future growth?”

Hyundai Engineering and Hyundai Group’s Hyundai Merchant Marine Co. both fell for a second day in Seoul trading after plunging 15 percent yesterday on concern that Hyun, 55, was overpaying for the builder amid competition from Hyundai Motor Group head Chung Mong Koo. Hyun may have to sell stakes in the builder’s most-profitable units or other assets to help pay for the deal, said Kim Do Joon, a fund manager at Hanwha Investment Trust Management Co.

Eroding Potential

“Such moves could eat into the builder’s growth potential,” he said. Hanwha Investment held Hyundai Engineering and Hyundai Merchant shares among its $8.8 billion of assets as of June, according to data compiled by Bloomberg.

Hyundai Group has taken steps to prepare for the acquisition for some time, Vice President Jean Jeong Ho said yesterday. He couldn’t disclose further details, he said. The deal is due to be completed next year, Hyundai Engineering creditor Korea Exchange Bank said yesterday.

Hyundai Merchant and affiliates Hyundai Elevator Co. and Hyundai Securities Co. have announced 2.27 trillion won of fundraising plans, some of which will be used to help pay for the 35 percent stake in Hyundai Engineering. The plans include taking loans as well as selling debt, shares and assets.

Debt Load

Hyundai Merchant, South Korea’s second-largest shipping line, has 694.6 billion won of bonds due by the end of 2011, according to Bloomberg data. Hyundai Elevator has 128.3 billion won due in the period, while Hyundai Securities has 1.8 billion won due. Hyundai Engineering has 400 billion won pending next year.

“This deal could hurt the financial structure of both the group and Hyundai Engineering,” said Ahn Soo Woong, head of research at LIG Investment & Securities Co. in Seoul. “The best funding source for the group would be selling some of Hyundai Engineering’s assets.”

Hyundai Group may sell a stake in the builder’s most-profitable unit, Hyundai Engineering Co., which designs refineries and manages construction, Mirae’s Byun said.

Hyundai Group’s Jean declined to comment on this yesterday calling it “market rumors.”

Hyundai Flagship

The controlling stake in Hyundai Engineering was put up for sale by creditors, who took over the builder in 2001 after it was unable to pay debts.

The company, the flagship of the original Hyundai Group, has a market value of $5.8 billion market value based on today’s 59,200 won closing price. The 35 percent stake being bought by Hyundai Group is worth $2 billion on that basis.

The builder fell 4.8 percent to close at 59,200 won today in Seoul trading after plunging as much as 9.8 percent earlier today. Hyundai Merchant tumbled 9.6 percent to close at 34,700 won.

Hyundai Motor Group severed ties with the original Hyundai Group in 2000, when founder Chung Ju Yung picked his younger son Chung Mong Hun as his successor over Chung Mong Koo. Chung Mong Hun, Hyun’s husband, committed suicide in 2003 after being charged in connection with illegal payments to North Korea. Hyun, then a housewife, took over as Hyundai Group chairwoman.

Sales Goal

Buying Hyundai Engineering may help Hyundai Group achieve its goal of boosting sales to 70 trillion won in 2020 by strengthening its logistics, finance and infrastructure businesses.

The deal may also help Hyundai Engineering take part in potential infrastructure projects in North Korea, which may be worth as much as 400 trillion won for next 30 years, according to Hyundai Group. The group has previously invested in the communist country.

The builder gets about 45 percent of revenue from construction of power plants and refineries and has contracts for a nuclear plant in the United Arab Emirates, natural gas works in Indonesia and oil piers in Kuwait. Projects including roads, dams and bridges make up another 45 percent of sales. The builder posted record profit for 2009.

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