SM Group vies for DSME's construction unit

Samra Midas (SM) Group, the white knight of several struggling South Korean shipping and construction companies, is vying with compatriot private equity investor Keystone Private Equity LP to acquire the construction subsidiary of Daewoo Shipbuilding & Marine Engineering (DSME).

The subsidiary, DSME Construction Co, Ltd, is one of several that DSME plans to sell to fulfill its KRW5 trillion (USD4.46 billion) self-rescue plan.

After bids closed on 7 June, it emerged that SM Group, Keystone, and Daemyung Construction had submitted bids, with the former two parties seen as having the best chance.

DSME hopes to sell its construction subsidiary by August.

Earlier this year, a consortium comprising mid-size Korean construction firm Bumyang Construction Co and private equity firm JKL Partners Inc attempted to buy DSME Construction for KRW18 billion (USD16 million). The deal did not go through as the consortium was unable to raise enough funds. Keystone PE has earned credentials for turning around distressed companies such as Dongbu Corp. Since the early 2000s, SM Group has growing through acquisitions, having bought struggling mid-sized construction firms such as Woobang, Sungwoo, and Dongah, enlarging its assets to KRW4.5 trillion equivalent to a level of a business group ranking in the top 50 overall in Korea.

Recently, SM Group has gained a reputation for being the white knight of troubled South Korean maritime enterprises, having recently acquired the remaining portfolio of now-defunct Hanjin Shipping and being tipped to acquire STX Corporation.

In late 2013, SM Group acquired Korea Line Corporation, now South Korea's second-largest dry bulk shipping company, taking the latter out of receivership. In November 2016, KLC acquired Samsun Logix, resulting in the latter being renamed Korea Shipping Corporation.

So far, DSME has managed to raise KRW2 trillion after selling golf course subsidiary FLC last year.

On 25 May, DSME announced that its board had approved the sale of its food-making and hospitality subsidiary Welliv for about KRW65 billion and ship design firm DSEC for USD62 million.

Keystone PE and another private equity firm, Bayside PE, were respectively named as the preferred bidders for DSEC and Welliv.

DSME was thrown a second lifeline on 18 April, after its bondholders consented to a KRW6.7 trillion (USD6.02 billion) second rescue package launched by the policy banks.

This aid package is conditional on DSME cutting another 1,000 jobs and implementing more intensive cost-cutting measures. Stakeholders, including bondholders must also agree to the debt-for-equity swap plan. The bailout would involve new loans of KRW2.9 trillion to DSME, while lenders and bondholders are to agree to swap KRW2.9 trillion of debt for new shares in the shipbuilder. The bondholders also have to agree to a three-year grace period for the repayment of the remaining amount.

DSME’s employees have also been asked to take a pay cut, while the labour union has been asked to promise not to go on strike. To set an example, DSME’s CEO Jung Sung-leep has pledged to return all his salaries earned in 2016.

While shipbuilders worldwide have been struggling with declining ship orders, DSME has been especially hard hit because of accounting fraud allegedly perpetrated by its previous CEOs, Ko Jae-ho and Nam Sang-tae. The fraud resulted in a massive USD2.8 billion loss for 2015.

On 18 January, Ko was jailed for 10 years.

On 10 March, Nam was charged with accounting fraud and his trial is pending.

Much of an earlier KRW4.2 trillion bailout went towards a debt-for-equity swap that saw Korea Development Bank owning more than 79% of DSME. However, this and including DSME's KRW5 trillion self-rescue plan that includes asset sales and job cuts have been insufficient to avert a liquidity crunch.

Contact Xiaolin Zeng at

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