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Financial institutions are paying attention to DL Group’s financing plan after the group’s subsidiary DL Chemical has acquired Texas-based specialty chemical manufacturer Kraton Corp for $1.6 billion (1.89 trillion won).

DL Chemical, South Korea's leading petrochemical company, has signed a definitive agreement to buy 100% of the U.S.-based company in an all-cash transaction, according to industry sources on Wednesday. The acquisition is expected to close in the first half of next year.

The total deal size, including a debt of $900 million, is $2.5 billion. DL Chemical is expected to use its cash reserves of 1 trillion won to finance half the $1.6 billion acquisition price while raising the remainder through loans backed by Kraton's assets.

DL Chemical had cash and cash equivalents of about 920 billion won as of the end of June, with the company estimated to have more than 1 trillion won in cash and cash equivalents as of the end of September.

The transaction is likely to provide financial institutions with opportunities to arrange a deal worth around 1 trillion won.

DL Chemical is expected to mull over various financing options to reduce financing costs, including using loans from U.S.-based financial institutions or dollar-denominated loans from domestic financial institutions, as the acquisition cost will be paid in dollars.

It is known that DL Group has been keen to acquire Kraton. DL Holdings, the holding company of DL Group, injected about 450 billion won into DL Chemical through a rights issue in June. DL Chemical may raise funds from domestic financial institutions if the group draws up the funding plan, analysts said.

There have been many cases in which a domestic company raised funds to fund a cross border deal. Most recently, Centroid Investment Partners used debt financing worth 900 billion won to fund its 1.9 trillion won acquisition of TaylorMade. Shinyoung Securities, KB Kookmin Bank, and Hana Financial Investment arranged the debt financing.

SK E&S also used domestic acquisition financing to fund its acquisition of U.S.-based Plug Power, which closed in March. The Korean company used debt financing worth $300 million to purchase a 9.9% stake in Plug Power, arranged by Korea Development Bank.

In 2019, Bain Capital used debt financing worth 230 billion won, arranged by Shinhan Financial Group and Hana Bank, to make an equity investment in CJ’s acquisition of Schwan’s Company. SJL Partners and KCC raised loan worth 1.2 trillion won in a deal to acquire U.S.-based Momentive Performance Materials. The loan was arranged by Korea Development Bank, the Export-Import Bank of Korea, KB Kookmin Bank, Hana Bank, and Korea Investment & Securities.

Kraton’s financial performance is likely to be one of the major considerations in DL Chemical’s possible external borrowing as the company’s assets are likely to be used as collateral. Kraton recorded revenue of $1.56 billion and earnings before interest, tax, depreciation, and amortization (EBITDA) of $262 million in 2020. It posted revenue of $930 million and EBITDA of $129 million, with EBITDA margin of 13.9%, in the first half of this year. (Reporting by Hee-yeon Han)