Bloomberg/Seoul

South Korea is enjoying its busiest deal spree in a decade as the Samsung and SK family-run conglomerates moved to cement management control and troubled companies found new owners.
The value of acquisitions involving Korean companies jumped 17% from a year ago to $86.4bn in the first nine months, data compiled by Bloomberg show. SK C&C Co’s $26.7bn purchase of SK Holdings and Cheil Industries’ $10.9bn buyout of Samsung C&T Corp put Goldman Sachs Group on the top of Korea’s merger adviser table, beating Morgan Stanley. South Korea clinched the second-most deals after China’s $362bn among emerging Asian economies.
Dealmaking has been driven by a generational shift in management at family-run chaebols and it remains to be seen if the sale of troubled units and a honing of business focus will spur the economy or boost earnings. The central bank sees gross domestic product growing 2.7% this year, the slowest in three years. The Kospi Large Cap Index, made up of the largest 100 stocks on the Korea Stock Exchange, rose 2.4% this year, while the Kospi Small Cap Index rallied 30% and the broader Kospi index advanced 6%.
“More deals will come on stream next year as groups like Lotte and Hyundai are likely to quicken their moves after Samsung and SK,” said Lee Jin Woo, a fund manager at KTB Asset Management Co in Seoul, who helps manage 9.4tn won ($8.1bn). “The implications from the deals on share prices are not immediately clear, even though there are hopes for the mergers to have impact as the change in structure may provide some impetus for growth.” Chaebol are also under pressure to simplify their ownership structure after lawmakers approved in 2013 a revision of proposal by the Fair Trade Commission to gradually resolve their cross shareholdings among subsidiaries. Lotte Group chairman Shin Dong Bin has been in a public fight with his elder brother over control of the group, while Hyundai Motor Co’s vice chairman Chung Eui Sun raised his holdings in the nation’s biggest carmaker, according to a Sept. 30 filing.
Standard & Poor’s said last month the net debt of the 150 biggest South Korean companies surged 40% since 2010 as they borrowed to make up for falling cash flows and unprofitable investments. Exports, which account for about half of GDP, fell every month this year due to cooling growth in China and weakening currencies of export rivals including Japan. A gauge of manufacturers’ business confidence, released by the Bank of Korea, stayed near a three-year low last month. The central bank cut its economic growth estimate for 2015 from 2.8% yesterday.
Declining profits, rising debt and corporate governance concerns at conglomerates made investors shun large- capitalization stocks and shift to nimbler companies. Operating profit at the 30 largest conglomerates fell to 57.6tn won in 2014, from a peak of 88.3tn won in 2010, data from the Chaebul website that covers wealthy families show. “Strong M&A activities will continue as companies forge ahead to restructure and improve efficiency,” said Kim Gene Oh, a Seoul-based lawyer at Kim & Chang which provided the most legal advisory for deals. “The poor economy is becoming the key reason for the brisk corporate deals. Companies need to select and concentrate on core businesses.”
The largest deal of the year was the acquisition of SK Holdings by SK C&C which helped pave the way forbnaire Chey Tae Won to solidify his family’s control over the country’s third-largest conglomerate. Samsung Group Chairman’s only son Lee Jae Yong made a similar move through the merger of Cheil Industries and Samsung C&T, whichbnaire activist Paul Elliott Singer called “unfair and unlawful” on August 6, after losing his battle with founding members.
“The top chaebol have led the way by selling non-core assets” and other chaebol will follow, said Dongsuk Choi, co- head of Korea investment banking for Goldman Sachs Group. “For the founders, it was difficult for them to sell something they’ve built up. But for the second and third generations, if the business is not looking to be a global player, it’s not worth keeping just to make them look big.” He forecast South Korea will become Asia’s top private equity market this year and the trend will persist.
Other deals included the sale of Pan Ocean Co, Hyundai Hysco Co, Tongyang Life Insurance Co, Hanjin Energy Co and Kumho Industrial Co Pan Ocean, which had been under court protection since June 2013, was sold to a consortium led by Jeil Holdings Co, while Hyundai Hysco was taken over by affiliate Hyundai Steel Co Tesco Plc’s sale of its Homeplus units in South Korea to a group led by private-equity firm MBK Partners Ltd for 4bn pounds ($6.1bn) was the biggest deal last quarter.
Share performances have been mixed. Samsung C&T has declined 15% since the deal was announced on May 26, while SK Holdings advanced 15% from April 20. Pan Ocean jumped 22% since June 12. Tongyang Life added 20% from February 17.
“The chaebol are getting pretty aggressive on the buying as well as the restructuring,” said Scott O, head of Korea M&A, at Citigroup Inc “Most of these are auction processes because there’s so much demand from buyers - from other conglomerates and private equity. It’s a sellers market - they’re going to get the right price and terms.”
Shipbuilders, Refiners  Slowing growth may spur more mergers in the shipbuilding and petrochemicals industries. The government has asked Hyundai Heavy Industries Co to manage STX Offshore & Shipbuilding Co, which has been under debt restructuring program since July, the Korea Economic Daily reported on Oct. 8. Hanwha Corp has worked on a proposal to merge some overlapping businesses with Lotte Chemical Corp and Hyosung Corp, Seoul Economic Daily reported on Sept. 16.
“The M&A activities related to corporate restructuring will remain strong in the next three to five years,” said Park JuGun, president of corporate watchdog CEOSCORE in Seoul. “It often coincides with the management handover at conglomerates and there’s a number of companies in need to speed up the succession process through simplifying the ownership structure.”