Family ties become key factor for S.Korea deals

By Kim Yeon-hee

SEOUL (Reuters) - Foreign investors wanting to buy South Korean companies are struggling to compete with powerful local conglomerates that use family ties and old business relationships to, in some cases, trump higher offer prices.

A decade after the Asia financial crisis, South Korea's giant chaebol are now looking to buy back former units they had to sell at fire-sale prices at that time.

And while few see a return to the bad old days, where vast sections of the economy were constrained by weak management and inefficient cross-shareholdings, chaebol do appear to have the upper hand on a number of upcoming deals.

Former owners often have the ability to pay more because they can reap greater cost savings and efficiencies, but are not always required too.

Such was the case with Mando Corp, where private equity firms CCMP and Affinity agreed to sell their majority stake in unlisted auto parts maker to Halla Engineering & Construction (014790.KS), which owned the company until 1999.

Halla beat out two other bidders -- Kohlberg Kravis Roberts KKR.UL and TRW Automotive Holdings (TRW.N) -- even though its $690 million offer valued Mando at as much as a third less than the highest bid, Mando said.

Foreign investors have become reluctant to the preference sellers have for domestic investors and to face aggressive bidding from the conglomerates.

The sales of majority stakes in Daewoo Engineering & Construction (047040.KS), bought by Kumho Asiana, and logistics firm Korea Express (000120.KS), bought by the same business group, drew little of the expected interest from offshore buyers.

"Recent deals, including the Korea Express sale, indicated that the selling side has put more value on how the buyer could create synergies than on whether they were offering the highest price," said a head of a local private equity fund.

"They also take into account whether the buyers will take over employees of the acquired company," he said, asking for anonymity because of the sensitivity of the labor issue.

Worries about reaction from strong labor unions, which could potentially lead to sit-ins or lock-outs, was also behind CCMP and Affinity's decision to favor Halla, another source involved throughout the deal said.

PIPELINE FAVOURS CHAEBOL

Hyundai Engineering & Construction (000720.KS) is another company which might be drawn back into the chaebol fold, with former affiliates Hyundai Heavy Industries (009540.KS) and Hyundai Motor (005380.KS) seen as potential buyers.

Hyundai Merchant Marine (011200.KS), another unit of the Hyundai Group, also has expressed interest in the builder, which has a market value of $9 billion.

Former units of the now-defunct Daewoo Group -- Daewoo International (047050.KS) and S&T Daewoo (064960.KS) -- have reportedly expressed interest in buying back into former affiliate Korea Delphi Automotive Systems, half owned by U.S. auto parts maker Delphi Corp (DPHIQ.PK).