Taekwang Industrial is weighing ways to raise the balance payment ahead of the closing of its acquisition of Aekyung Industrial Co. in February. With the use of treasury shares blocked, bank loans and securitization of real estate assets are being discussed as likely financing options. Taekwang Industrial holds about 2 trillion won in cash and cash equivalents, but decided to raise part of the funds in the market to stabilize its financial structure.
According to Taekwang Industrial on the 2nd, the company is reviewing other financing options after scrapping a plan to issue 320 billion won in exchangeable bonds backed by treasury shares. A company official said, "We determined it is more advantageous to raise funds in the market than to use on-hand cash for the acquisition," and added, "After reviewing various methods, we plan to secure and deploy sufficient funds by February before paying the balance for Aekyung Industrial Co."
The balance Taekwang Industrial must pay for Aekyung Industrial Co. is 446.5 billion won. On Oct. in the main contract, the Taekwang Industrial consortium agreed to acquire a 63.13% equity stake from the largest shareholder of Aekyung Industrial Co. for 470 billion won and paid a 5% deposit of 23.5 billion won. The remainder is to be paid on Feb. 19.
Taekwang Industrial has recently been aggressively pursuing mergers and acquisitions. Following Aekyung Industrial Co., it decided to purchase the Courtyard Marriott Seoul Namdaemun hotel for 250 billion won. It plans to pay the balance by year-end. Forming a consortium with the U.S. private equity firm TPG, it also jumped into the race to acquire the mid-sized shipbuilder K Shipbuilding Co., Ltd. K Shipbuilding's enterprise value is estimated at more than 500 billion won.
Taekwang Industrial also plans to support its subsidiary Heungkuk Life Insurance's funding for the acquisition of IGIS Asset Management. Heungkuk Life Insurance is said to have bid the highest price among bidders by offering around 1 trillion won in the main tender for IGIS Asset Management. To raise acquisition funds, Heungkuk Life Insurance sold the Heungkuk Life Insurance Building in Gwanghwamun to Heungkuk Core REITs, securing 720 billion won.
Taekwang Industrial has maintained a no-borrowing management stance, minimizing external financing. Although it has ample cash, the company says it will not exhaust it all on mergers and acquisitions. As of the end of the third quarter this year, cash and cash equivalents are close to 2 trillion won. Cash-equivalent assets swelled with an inflow of 900 billion won from the sale of SK Broadband equity in April last year. Short-term borrowing fund stands at only 40 billion won.
In the industry, some see a possibility that Taekwang Industrial will first tap market loans on the back of its high credit quality. The liability ratio—total liabilities divided by total equity—of Taekwang Industrial is 16%, a very low level. It also has a record of receiving an AA- credit rating in 2010. An industry official said, "Even if Taekwang Industrial borrows from banks or issues corporate bonds, it can raise funds at the lowest interest rates."
Asset securitization based on Taekwang Industrial's prime real estate in Seongsu-dong and Gangnam, Seoul, and in Busan is also possible. Taekwang Industrial launched Heungkuk REITs Management in April and, in September, created Heungkuk Core REITs, which holds the Heungkuk Life Insurance Building in Gwanghwamun. It then created Taekwang No. 1 REITs and led the acquisition agreement for the Courtyard Marriott Seoul Namdaemun hotel.
A representative of Truston Asset Management, the second-largest shareholder of Taekwang Industrial, said, "Just the Seongsu-dong land of Taekwang Industrial alone is worth over 1 trillion won in the market. If appraisals for the main sites are done properly, the real estate value alone would amount to several trillion won. It is possible to raise hundreds of billions of won using only real estate."
Meanwhile, after its exchangeable bond issuance was blocked, Taekwang Industrial is also said to have considered using a price return swap (PRS) to securitize its treasury shares. As the share price climbed to an intrayear high of 1.2 million won, Taekwang Industrial sought to issue exchangeable bonds backed by treasury shares.
A company official explained, "At the time, 320 billion won was calculated based on the value of the treasury shares, but how much funding the company will need going forward is something that needs to be reassessed."
Another capital markets official said, "The current management seems to think that raising funds in the stock market does not incur expense. There are ample capital-raising methods, including borrowing and asset sales."