Chaebol Founder Dismantles Life’s Work as Slump Deepens: Freight
Kang Duk Soo spent eleven years turning a failing ship-engine maker into a conglomerate with $23 billion in assets. He is now dismantling it.
His STX Group put the controlling stake of its shipping unit up for sale last week as it tries to raise 2.5 trillion won ($2.3 billion) to pay off debt. It’s already spent nearly a year looking for a buyer for its affiliated offshore-vessel maker.
Kang, 62, was dubbed the ‘legendary salaryman’ in South Korea after he used his life savings in 2001 to found his own chaebol, the business groupings that dominate the country’s economy. An expansion into China right before the collapse of the shipping market in 2008 crippled his ability to raise funds. His three main companies now have $1.4 billion of bond and loan due next year, according to data compiled by Bloomberg.
“Kang really doesn’t have much choice,” said Shin Ji Yoon, an analyst at KTB Securities Co. in Seoul. “Investors have lost confidence in the group.”
STX also said last week that it is holding discussions with potential strategic investors for its Dalian, China shipyard. It had previously planned to hold an initial public offering for the yard, one of the two biggest overseas investments by Korean shipbuilders.
The group is “firm on our plan to improve our finances” by selling shipping unit STX Pan Ocean (028670) Co., it said in a Dec. 12 statement. “We also hope this will help to regain market confidence.”
Kang has already sold a stake in an energy unit for 360 billion won and he will merge two engine-making units as he seeks to cut costs and pay debts. Talks on the sale of a stake in offshore-vessel maker STX OSV Holdings Ltd. (SOH) are nearing completion, the group said last week.
OSV rose 1.1 percent to S$1.40 in Singapore trading today. Pan Ocean closed unchanged at 4,230 won in Seoul.
The opening of the Chinese yard in 2008 marked the pinnacle of Kang’s business empire, which he built after a 27-year career at Ssangyong Group. Kang founded STX in 2001 when he used his 2 billion won life savings to buy a former Ssangyong engine-making business.
Kang renamed the company STX Corp. (011810), derived from Systems, Technology and Excellency, and subsequently turned it into South Korea’s 13th biggest business group, according to a government ranking. STX’s companies, like other chaebols, are linked together through a web of cross-shareholdings.
Kang partly built STX by buying financially struggling companies. In 2001, he bought Daedong Shipbuilding Co., then- South Korea’s eighth-largest shipbuilder, which had just exited court protection. He renamed it STX Offshore & Shipbuilding Co. Three years later, Kang bought Pan Ocean Shipping Co., which was then in bankruptcy protection.
The two companies both benefited from China’s surging demand for iron ore, coal and the vessels to carry them. Korean shipbuilders posted five years of record orders through 2008, which prompted STX to build the yard in Dalian. Pan Ocean’s earnings jumped as Chinese shipping demand helped cargo rates more than double in four years.
The bubble burst as Chinese shipyards churned out new vessels, helped by government support, causing a glut of capacity. The Baltic Dry Index (BDIY), which tracks dry-bulk shipping rates, has plunged more than 90 percent from its record close in May 2008. Chinese shipyards’ vessel orders tumbled 47 percent from a year earlier in the January-November period to the least since 2003, according to Clarkson Plc, the world’s biggest shipbroker.
The market plunge has left STX companies struggling to make money. The holding company that oversees the group’s shipbuilding and offshore operations in China had a loss of 10.7 billion won last year on sales of 2.39 trillion won. The Dalian yard has won $1.2 billion of orders this year, surpassing last year’s tally of $300 million. The group said in 2008 that the yard would post annual sales of $3.8 billion by 2010.
Other shipping and shipbuilding groups have also suffered in the market slump. Ship operator Korea Line Corp. has been in court receivership for almost two years as new investors are sought. Ulsan, South Korea-based Hyundai Heavy Industries Co., the world’s largest shipbuilder, has offered early-retirement programs demand withers.
“Kang is very serious about trying to improve the group’s finances,” said Um Kyung A, an analyst at Shinyoung Securities Co. in Seoul. “But things can’t really improve until the shipping and shipbuilding industries recover, and that’s something he has no control over.”
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