Morgan Stanley unit drops Daewoo Elec buy deal

SEOUL (Reuters) - A private equity unit of Morgan Stanley (MS.N) has pulled out of a deal to buy South Korea's Daewoo Electronics, in a second failed attempt for creditors to sell the loss-making appliance and television maker.

Morgan Stanley Private Equity was picked in February as the top bidder for the electronics company, which had been put up for sale again after creditors last year scrapped a proposed $746 million sale to a foreign consortium.

"The firm has withdrawn from the process," a spokesman for the investment unit told Reuters in an email on Thursday. He did not elaborate.

Daewoo Electronics had been part of the now-defunct Daewoo Group and been put up for sale by creditors led by Woori Bank.

Last year, talks with a consortium of India's Videocon Industries Ltd (VEDI.BO) and RHJ International (RHJI.BR), the holding company of U.S. buyout fund Ripplewood, fell through due to price disagreements.

Online news outlet EDaily reported that Daewoo Electronics' labour union had demanded three-year job security as part of the sale conditions, citing industry sources.

Morgan Stanley Private Equity also faced a renewed backlash against foreign investors, triggered after some foreign private equity funds enjoyed huge tax-free profits by snapping up distressed Asian assets following the Asian financial crisis of the late 1990s.

An official of Woori Bank, a unit of Woori Finance Holdings (053000.KS), said it had not yet obtained written notice of Morgan Stanley Private Equity's withdrawal.

Under a preliminary agreement, the deal would remain in effect until the end of August.

EDaily quoted an unnamed senior official with one of Daewoo's creditors as saying that creditors would try to contact runner-up candidate Ripplewood before implementing steps to keep the electronics company afloat.

Unlisted Daewoo was placed under a debt rescheduling program after its parent group went bankrupt in 1999. Since restructuring the company has focused on TVs, air conditioning units and refrigerators.

The company had drawn little interest among Korean firms as it competes with low-priced Chinese producers and bigger domestic brands Samsung Electronics Co Ltd (005930.KS) and LG Electronics Inc (066570.KS).

Daewoo Electronics posted a 128.7 billion won ($122.4 million) net loss in 2007 after the previous year's loss of 183.5 billion won, according to a regulatory Web site.

The failure to sell the South Korean firm may reignite concerns about negative sentiment towards foreign investment in the country, as U.S. private equity house Lone Star's LS.UL exit from its 2003 purchase of Korea Exchange Bank (004940.KS) has been delayed by legal disputes.

(Reporting by Kim Yeon-hee; Editing by Jonathan Hopfner)

($1=1051.1 Won)