Hanwha's Takeover of Daewoo Shipbuilding Raises Funding Concern

By Kyunghee Park and Seonjin Cha

Oct. 25 (Bloomberg) -- Hanwha Group's successful bid for the world's third-largest shipbuilder raised concern the South Korean industrial company may struggle to raise funds for the buyout amid the global financial crisis.

A contract for the controlling stake in Daewoo Shipbuilding & Marine Engineering Co. will be signed in December after Hanwha completes due diligence, Chung In Sung, senior executive director at Korea Development Bank, said in Seoul yesterday. The bank, which arranged the sale and is the shipyard's biggest shareholder, didn't disclose how much Seoul-based Hanwha will pay for the 50.4 percent stake.

Hanwha, with interests from explosives to shopping malls, is seeking to expand its construction and energy businesses into areas including oil tankers and deep-sea drilling structures to boost earnings growth. Shares of its main units fell by their daily limits yesterday on concern the global credit crunch will increase costs to fund the offer, valued by analysts at as much as 6.77 trillion won ($4.6 billion), according to a report today by Korea Economic Daily.

``In the current environment, it will be difficult for companies to finance that much money,'' said James Kim, an analyst at KB Investment & Securities Co. in Seoul. ``Shares in companies that are linked in any way with possible mergers and acquisitions get battered.''

Stocks Plunge

Hanwha Chemical Corp. and Hanwha Corp., units of Hanwha Group, plunged 15 percent yesterday in Seoul trading. The key Kospi index slid 11 percent, as the slowest growth in four years stoked concern the economy is headed for a recession.

``We don't expect Hanwha will have problems raising funds for the takeover, based on the proposal it submitted,'' Korea Development Bank's Chung said.

Hanwha will comply with the rules set for the takeover, it said in a statement yesterday. Total debt at the three Hanwha units taking part in the bid, including unlisted Hanwha Engineering & Construction Corp., stood at 7.6 trillion won at the end of June, according to Aug. 14 regulatory filings. They held a combined 1 trillion won in cash.

Daewoo Shipbuilding's order backlog totaled $45.24 billion at the end of August, with drill ships and other offshore platforms accounting for a third of the orders. The shipyard builds vessels in South Korea's Okpo City and in Romania.

``Finally Daewoo Shipbuilding will have an owner that will enable the company to become more aggressive in expanding its business and exploring new opportunities,'' said Lee Jae Kyu, an analyst at Mirae Asset Securities Co. in Seoul.

Hyundai Heavy Industries Co., the world's biggest shipyard, which also bid for the stake, said it accepts Korea Development Bank's decision.

Record Run Ending

The transaction, the largest in the shipbuilding industry, comes as South Korean shipyards show signs their five-year run of record orders is ending as demand for fuel and consumer goods slows. Shipbuilding contracts fell 22 percent in the first eight months of the year, according to Clarkson Plc, the world's largest shipbroker.

Still, orders at South Korean yards, the world's biggest, reached a record $215.6 billion at the end of August, accounting for about 40 percent of a global $544.9 billion, Clarkson said.

Korea Development Bank, which owns 31 percent of Daewoo Shipbuilding, and Korea Asset Management Corp., with 19 percent, became shareholders after rescuing the company from near- collapse. They swapped their debt for equity in December 2000.

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