By Sungwoo Park and Bomi Lim
May 14, 2010, 3:21 AM EDTMay 14 (Bloomberg) -- Posco, Asia’s third-biggest steelmaker, was chosen as preferred bidder for a controlling stake in trader Daewoo International Corp., in what will be Chief Executive Officer Chung Joon Yang’s biggest acquisition.
The steelmaker’s bid was better than an offer by Lotte Group, the nation’s biggest department-store operator, South Korea’s Public Fund Oversight Committee said in an e-mailed statement today, without revealing prices for the steel and crude oil trader.
Chung, planning to spend $5 billion on mines, in January said Daewoo International, with nickel, coal, oil and gas assets, is the “top” acquisition priority as material costs surged. Vale SA and BHP Billion Ltd. this year broke with a 40 year- tradition of setting annual prices for iron ore, winning as much as a 90 percent gain for quarterly contracts from steelmakers.
“Steelmakers are in a battle for raw materials,” said Lee Jin Woo, who helps manage $8.8 billion at KTB Asset Management Co. in Seoul. “Posco will benefit from Daewoo’s expertise in resources development. They have to keep investing in mines.”
Posco, which counts Warren Buffett’s Berkshire Hathaway Inc. as a shareholder, has dropped 25 percent this year as costs gained. The shares rose 1.5 percent to close at 464,000 won in Seoul and Daewoo International dropped 2.2 percent to 34,050 won.
Stake Sale
South Korea wants to sell at least 50 percent and one share in Seoul-based Daewoo. Posco offered 3.4 trillion won ($3 billion), trumping the 3.2 trillion won bid by Lotte, to secure a 68.15 percent stake, Internet news provider MoneyToday said May 8.
“We expect an acquisition of Daewoo International to help beef up our efforts to explore overseas markets and secure raw- material supplies through resources development,” said Chung Jae Woong, a spokesman for Pohang-based Posco. He declined to provide details about the bid value.
Daewoo International owns stakes in a nickel mine in Madagascar, a coal mine in Australia and an oil block in Vietnam. The nickel reserves are estimated at 125 million metric tons, one of the world’s four biggest. It also operates a natural gas project in Myanmar.
Daewoo International gets 98 percent of sales from trading, with steel and metal accounting for 60 percent. The trader, which also runs a shopping center and sells automobile parts, handles about one quarter of Posco’s steel exports.
Posco may sell the trader’s 24 percent stake in Kyobo Life Insurance Co. should it buy Daewoo, spokesman Chung said.
Credit Rating
The acquisition shouldn’t affect Posco’s credit rating, Fitch Ratings Ltd. said in a statement today.
“Posco will be able to secure stable raw-material supplies through Daewoo International,” Kim Seung Won, an analyst with Hanyang Securities Co., said in Seoul. “A key asset of trading companies is their localized networks, which will help find mining projects and win support from local governments. Posco can use Daewoo as a trading arm as it is expanding abroad.”
Samjong KPMG Advisory Inc. and Bank of America Merrill Lynch are arranging the sale. Macquarie Group Ltd., Woori Investment & Securities Co. and Shinhan Investment Corp. are advising on Posco’s bid, the steelmaker said in December.
Should final talks with Posco fail, discussions will open with Lotte, the state committee managing the sale said.
Expansion Plans
Posco’s Chung, 62, is already spearheading a $30 billion capacity expansion plan in countries including India and Indonesia, and last year acquired Asia Stainless Corp. in Vietnam and TaihanST Corp in South Korea. He agreed this year to buy as much as a 15 percent stake in the Roy Hill iron ore project in Australia. The company is also studying a coal mine in Mozambique, it said in February.
The expansion plans may lead to a downgrade of its credit rating and buying Daewoo International will tax Posco’s finances, Moody’s Investors Service said May 12. Daewoo International has “much weaker business and financial profiles,” Moody’s said.
Daewoo posted 11.1 trillion won in sales last year, with net income up 42 percent to 124.6 billion won. Posco’s profit last year was 3.2 trillion won, and it forecasts 2010 sales of 31.9 trillion won.
Posco plans to double Daewoo International’s sales to 20 trillion won by 2018 and expand overseas branches to more than 100, spokesman Choi Doo Jin said today by phone.
The steelmaker may be better off “to put the money directly into mines instead of developing raw materials by acquiring Daewoo International,” Park Hyoung Ryol, a money manager at Consus Asset Management Co. with $2.6 billion in assets including Posco shares, said from Seoul. “They have sufficient cash and good cash flows.”
--Editors: Tan Hwee Ann, Keith Gosman.
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