SEOUL - The world's third-largest shipbuilder, Daewoo Shipbuilding and Marine
Engineering Co (DSME), rescued in the aftermath of the 1997-98 Asian financial
crisis, is expected to be put on sale next week, part of efforts by President
Lee Myung-bak's government's efforts to cut state business holdings. The sales
will boost state funds as economic growth in the country slows. Offloading DSME
might raise more than US$3.5 billion.
State-run Korea Development Bank (KDB) has completed due diligence inspections
on DSME, based in the southern island of Geoje, and after seeking initial
purchase offers from next week will conduct reviews of offers in September
before picking a primary negotiation partner by October, sources said.
Lee, elected last December, is moving to deliver on campaign
pledges for economic reforms after seeing his popularity decline following an
agreement that Korea would import US beef. The government earlier this week
said it will sell or merge 41 of the nation's 319 state-owned companies. Stakes
going on the block include 49% of Incheon International Airport Corp and part
of Industrial Bank of Korea and its affiliates.
Korea Gas and Korea Electric Power were not included on the sale list, amid
concern their sale would lead to higher energy costs and further hurt Lee's
public standing, analysts said. The president is starting the privatization
with caution "as he needs to consider the public opinion and his popularity'',
Bloomberg reported Hana Daetoo Securities Kim Jae Eun as saying. The government
plans to hold public hearings to discuss further details of the sales and
submit a bill to the National Assembly in September, Bloomberg said.
South Korea's largest steelmaker, POSCO, and the GS, Doosan and Hanwha groups
have expressed their intentions to buy DSME, according to media reports. The
company is coming up for sale after announcing last week that it had won a
$709.7 million order for a semi-submersible drilling ship and, in an earlier
filing with the Korea Exchange, that it had secured a $758 million deal to
build a drill ship, both orders coming from unnamed American customers, Reuters
reported.
Even so, the value of KDB's holding in DSME alone, coupled with those of Korea
Asset Management Corp, should exceed 3.7 trillion won (US$3.55 billion),
analysts said, and the proposals for this and others sales come at a bad time
for corporate Korea. Direct financing by the country's companies tumbled almost
19% in July from a month earlier to 4.5 trillion won, according to the
Financial Supervisory Service (FSS), as declining stock markets and the global
credit crunch made raising money more difficult.
No foreign companies will be allowed to buy DSME because the yard has made
warships and submarines for the South Korean navy. Under South Korean law, the
government can ban the sale of companies that could result in the transfer of
classified military technology. "It is inappropriate for foreign investors to
take over Daewoo Shipbuilding," Financial Services Commission chairman Jun
Kwang-woo told lawmakers this week, the Korean Times reported on Tuesday.
Foreign interest in other South Korean companies up for grabs may be limited,
if present investment levels are a guide. Foreign direct investment (FDI) in
South Korea was 8.8% of the country's gross domestic product at the end of last
year. That was more than double the roughly 3% level in Japan but far behind
the 45% FDI level in Britain and 14% in the US.
Local companies meanwhile are having to contend with an economy, Asia's
fourth-largest, that is showing signs of strain as oil and raw material costs
soar. Economic growth slowed to 4.8% in the second quarter, and the central
bank has downgraded its forecast for full-year growth to 4.6%.
Inflation in 2008 is forecast at 4.8% after consumer prices rose 5.9% in July
from a year earlier, a near 10-year high. Factory-gate, or producer, prices are
also climbing, adding to consumer price inflation pressure. Korea ranked top
among members of the 26-member Organization for Economic Cooperation and
Development for both growth in producer prices during the second quarter. To
help stem inflation, the Bank of Korea's benchmark interest rate was raised to
5.25% last week.
While local demand is weak, exporters are profiting from a weaker South Korean
currency - the won has declined 8% against the US dollar this year. At the same
time, that has driven up the cost of imports. South Korea's terms of trade, the
ratio of the export price index over the import price index, deteriorated 11.6%
in the second quarter, according to the Bank of Korea, the central bank.
Exports, which account for about 40% of the economy, are likely to "remain
strong" on rising demand from China, the Middle East and other emerging
markets, the government said last week. Some economists are concerned, however,
at signs of slowing growth in China, the Korean Herald reported this week.
China makes up 22% of Korea's total exports, almost double overseas shipments
to the United States. Slowing demand in China would immediately affect
corporate investment and employment levels in Korea, the report said.
China-related investment funds in Korea reached 22.78 trillion won as of August
8, up from 9.7 trillion won a year ago, according to the Asset Management
Association of Korea.
The plan to sell state-run companies was criticized on Thursday by the Korean
Daily News as lacking substance. The biggest state-owned businesses have been
omitted "while it appears that only minor ones few Koreans ever heard of are
included", an editorial on the newspaper's English-language website said. The
latest plan "misses the key objective of boosting Korea's economic efficiency
by streamlining the bloated structure of state-run companies."
(Asia Pulse with additional reporting by Asia Times Online.)
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