이 기사는 2020년 04월 21일 08:00 thebell 에 표출된 기사입니다.

What are the potential scenarios for a sale of Doosan Engineering & Construction, the construction arm of South Korea’s cash-strapped conglomerate Doosan Group? Industry observers are placing more weight on the possibility that the company’s assets could be sold separately, rather than the business being sold as a whole.

Doosan Group submitted last Monday a self-rescue plan to improve the financial position of Doosan Heavy Industries and Construction, the conglomerate’s key unit, to its creditors led by the state-run Korea Development Bank (KDB). The plan included selling Doosan Co., Ltd.’s subsidiary Doosan Solus, a battery copper foil maker, and cutting pay of executives and staff employed by affiliates of the conglomerate.

The possibility has also been raised that the conglomerate’s other businesses, including Doosan E&C, could be offloaded. “From what I understand, Doosan Group has long been in talks with potential buyers for Doosan E&C,” an industry source said. “Doosan Group appears to be willing to shed Doosan E&C as long as it can sell the company at its target price.”

Many have speculated that the construction company could be sold as a whole or in parts, though the likelihood of the latter scenario seems to be increasing due to several risk factors that make the company – which is known for its apartment brand We’ve – less attractive to possible buyers.

One of the major risk factors identified in the company’s financial report is the risk of materialization of contingent liabilities. According to credit rating agencies, Doosan E&C is estimated to have about 312 billion won of contingent liabilities involving project financing, largely related to long delays in new construction projects.

“Doosan E&C established massive reserves for anticipated losses resulting from vendors’ inability to pay, some of which can be materialized in the future,” an official from a credit rating agency said. According to its latest annual report, Doosan E&C set aside total 1.61 trillion won in reserves for anticipated losses in relation to the collection of receivables at the end of 2019.

Payment guarantees are another risk factor. According to its latest annual report, Doosan E&C guaranteed about 2.74 trillion won worth of debt for the likes of developers and social overhead capital (SOC) projects. At the same time, a huge amount of the company’s debt was guaranteed by several institutions such as Construction Guarantee (CG) and Korea Housing & Urban Guarantee Corporation (HUG).

“Payment guarantees can potentially result in increased contingent liabilities, which could be one of the reasons for potential buyers to be hesitant to bid for the company,” another industry source said.

As a result, separating assets with risks involving debt issues to sell the rest first seems to be a more likely scenario for a sale of Doosan E&C, market watchers said. Under this scenario, a sale process could be led by a court due to different interest among creditors.

That was the case when smartphone maker Pantech was sold in 2015. Then-bankrupt Pantech first sold itself excluding some non-operating assets, and had all remaining assets liquidated. “At the time, Pantech chose to exclude distressed assets and sell the rest in order to increase its chances of being sold,” said a source with knowledge of the deal.

There is also a scenario where each business unit of Doosan E&C is sold to different buyers, which was the case for STX Heavy Industries. Being under court protection, the shipbuilder sold its plant construction business to Global Sae-A and its engine parts business to Pinetree Partners, respectively, in 2018.

Doosan E&C consists of three divisions: civil engineering, building and housing construction, and others including leasing services.

“The majority of potential strategic investors interested in Doosan E&C, including mid-sized builders based in regional areas and those seeking to expand their business scope to include construction, seem to be mulling over a partial acquisition of the company,” an industry source said. “If a sale process is led by a court, the company’s assets could be sold through a stalking horse auction.”

(By reporter Kim Byung-yoon)