beyondbrics

By Yukyeong Kim of mergermarket

The world’s third biggest steelmaker, Pohang Iron and Steel Company (Posco), has completed its acquisition of Daewoo International for $2.8bn, three months after being chosen as the preferred bidder for the South Korean trader and resource developer.

The acquisition is the largest deal between two Korean companies and signals the steelmaker’s ambition to expand in Africa and southeast Asia.

Posco will acquire 68 per cent of Daewoo International through the deal, which is its first sizeableable acquisition. The company, whose shareholders include Warren Buffet’s Berkshire Hathaway, purchased Daewoo for 53 per cent more than Daewoo’s closing share on August 27, its last day of trading prior to the deal being announced.

Earlier this year rating agency Fitch put forth an upbeat forecast for the merger. As the FT reported in May:

Should the acquisition be successful, there is a potential for synergies given the overlaps in the two companies’ businesses.

For instance, Posco’s steel business can benefit Daewoo’s trading of steel and steel raw material operations, whereas Daewoo’s strong sales network in emerging markets will support Posco’s steel exports.

What a difference three months can make.

Posco’s announcement that it would fund the deal without a financial investor, as well as concerns over Daewoo’s “considerably weaker” operations, were enough for another rating agency – Moody’s – to immediately downgrade Posco’s foreign currency bonds from A1 to A2. On Tuesday, after the announcement on Monday and subsequent Moody’s downgrade, Posco’s shares fell 2.1 per cent to close at Won 486,500 on South Korea’s main Kospi index.

Despite the downgrade Posco’s chairman Jung Jun-Yang remains upbeat. He told an audience during the share purchase agreement ceremony at the Coex International Hotel on Monday that Daewoo International has “great potential” and that the deal would bring global operational synergies for both companies.

Posco already derives about around 20 per cent of its sales revenue from Daewoo International, which is the largest seller of Posco products and itself increased revenue by 62 per cent in the first half of this year to Won 7.8 trillion ($6.6bn).

Daewoo International is the largest trader of Posco products. Given the fact the company is also spearheading development of Myanmar’s largest undeveloped gas fields, Swe and Myao, it is perhaps not so difficult to see why Jung might feel the deal and the subsequent weakening of Posco ‘s balance sheet are worth the short-term risk.

But the real attraction for Posco is that Daewoo assets will help it complete a major stage of its expansion plan into emerging markets in Africa and southeast Asia. According to its interim report around 65 per cent of Daewoo International’s sales revenues come from Asia, Africa and Oceania. Rival raw material producers, most notably from India, have already sought to tighten their grip on new markets.

With the developed world market also increasingly fractious, Posco clearly feels full control over such local networks is worth the price. The steelmaker is also looking to expand into the renewable energy sector and has its sights on Norway’s Elkem, which makes silicon for solar panels.

Woori Investment & Securities, Macquarie Group, and Shinhan Investment Bank were advising Posco on the Daewoo deal.

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