이 기사는 2021년 05월 28일 08시02분 thebell에 표출된 기사입니다

Jungheung Construction may seek to team up with an investor that will provide financial support as it vies for Daewoo E&C in a bid to turn itself into a major industry player.

The mid-sized property company, based in Gwangju, has joined real estate developer DS Networks to acquire Daewoo E&C by sending its letter of intent to the builder’s owner, Korea Development Bank (KDB), industry sources said.

A consortium led by DS Networks, which earlier submitted its letter of intent, is working with Morgan Stanley to prepare a binding bid.

Jungheung Construction has long been considered a potential buyer of Daewoo E&C, although it did not submit an offer when KDB embarked on a bidding process for the company in 2017. Jungheung Group chairman Jung Chang-sun told reporters in 2019 that he would explore acquisition opportunities in the industry to grow the construction business.

“The offer is non-binding, but Jungheung Group seems quite serious about acquiring Daewoo E&C,” said an industry insider.

The key to whether Jungheung Construction will complete the race lies in its ability to fund the acquisition, industry watchers said. A 50.75% stake in Daewoo E&C owned by KDB is estimated to be worth around 2 trillion won ($1.8 billion), compared to about 1.6 trillion won proposed by Hoban Construction three and a half years ago. During this period, the company’s profitability has improved and concerns about contingent liabilities from its overseas projects, which have been weighing on the valuation, have been eased.

The 2 trillion won price tag appears too high for Jungheung Construction to pay alone. The property firm and its civil engineering affiliate only held a combined 652 billion won in cash and cash equivalents at the end of 2020. This means high leverage should be used for the acquisition.

That is a reason that many believe Jungheung Construction may want to form a consortium as rival suitor DS Networks did. The real estate developer teamed up with private equity firm SkyLake Equity Partners, which is known for its fundraising capability. The DS Networks-led consortium also includes IPM Group, a UK-based investment firm specializing in investments in infrastructure assets and infrastructure-related technologies around the world.

In contrast, both Jungheung Construction and its civil engineering affiliate are highly concentrated on the domestic market and have little experience in overseas markets. This could be considered as a weakness given a large portion of Daewoo E&C’s revenue coming from overseas.

“Hoban Construction, similar to Jungheung Construction in terms of size, ultimately pulled out of the acquisition of Daewoo E&C due in large part to contingent liabilities from overseas businesses,” another industry insider said, adding that the ability to manage overseas construction projects would be “essential” for suitors for the company.

“A company that would eventually buy Daewoo E&C may face the winner’s curse considering deal size worth trillions of won and the potential risk related to the builder’s overseas businesses. So, it could be wise for a prospective buyer to submit a bid as a team to diversify risks.” (Reporting by Byung-yoon Kim)