ANALYSIS-S.Korea M&A market heads for hefty premiums in 2007

By Kim Yeon-hee and Kim Soyoung

SEOUL, Feb 14 (Reuters) - South Korea's M&A market looks set to top 2006's record $42 billion this year as a raft of companies and financial investors with deep pockets line up for targets ranging from builders to telecoms firms to retailers.

Domestic strategic investors such as major conglomerates are expected to lead the market for high-profile deals, joining forces with a growing pool of local investment and pension funds.

Consolidation in mature industries such as the financial and retail sectors may also spur acquisitions or strategic shareholdings, while government agencies and creditors are ready to sell the last batch of companies bailed out since the late 1990s financial crisis. "It's a seller's market. Valuations will be very high, up to several times market values," said Kim Ki-young, head of Daewoo Securities' M&A team.

Foreign investment funds, however, may be loath to enter the fray after U.S. fund Lone Star [LS.UL] scrapped a $7.3 billion sale of Korea Exchange Bank (004940.KS) to Kookmin Bank 06000.KS because of a long legal battle with prosecutors.

Further clouding the upbeat outlook are political uncertainties ahead of the December presidential election. Government officials may hesitate to privatise top companies before a new administration is in place, analysts say.

But domestic competition alone should drive the price tags of target firms higher.

Despite fears of anti-foreign sentiment, Chinese firms armed with proceeds from bank IPOs and Indian investors are expected to chase more South Korean targets to secure technology and brands.

"There will be an increasing preference for deals not to be led by foreign strategic investors and private equity funds," said John Walker, CEO of Shinhan Macquarie Financial Advisory, a joint venture between Macquarie Group MBL.AX and Shinhan.

"We expect valuations to continue to be very high because we expect companies to move towards better corporate governance."

Banks and some investment funds are poised to pocket a big windfall from disposing of shares in restructured companies.

Goldman Sachs (GS.N), a top shareholder in Korea Express Co. Ltd. (000120.KS), is likely to offload its 24 percent stake in the country's biggest logistics firm, together with an additional stake from other creditors sometime this year.

South Korea ranked second in 2006 Asian M&A deals by volume outside Japan, according to data firm Dealogic, which included the No. 2 lender Shinhan Financial Group's (055550.KS) purchase of LG Card Co. Ltd. 032710.KS for $7.2 billion.

JPMorgan (JPM.N) led the ranking of the top investment banks on M&A advisory in South Korea last year, according to market data firm Dealogic. It advised on six transactions with a total value of $14.36 billion, followed by UBS (UBSN.VX) at $7.5 billion and Citigroup (C.N) at $6.95 billion.

Shin Won-jung, head of Samsung Securities' M&A team, expects the 2007 value of domestic M&A deals to match or surpass last year's $42 billion.

Topping the list of companies seen up for grabs are top builder Hyundai Engineering & Construction (000720.KS) and the world's No.2 shipbuilder Daewoo Shipbuilding (042660.KS).

(To read a factbox on key Korean M&A deals expected in 2007, click on [nSEO207657])

LIQUIDITY, DIVESTMENT

South Korean firms are estimated to hold more than $230 billion in assets convertible to cash soon, with local private equity funds seen to have some $95 billion under management, according to the Korea stock exchange and regulatory agency.

Analysts expect a 50 percent stake in Korea Express to be sold for at least $1 billion -- about a 40 percent premium to the market price, while seeing a 50.3 percent stake in Hyundai Engineering fetching at least $5 billion, more than a 50 percent premium to the stock price and about 23 times its 2006 earnings.

Such high premiums, as witnessed in the 2006 sales of LG Card and Daewoo Engineering and Construction (047040.KS) at more than twice their market prices, would also curb appetite of foreign investment funds which had snapped up distressed local assets.

Instead, foreign funds may shift towards smaller deals or divest themselves of South Korean assets.

Market talk has been swirling that Newbridge Capital [NB.UL] and American International Group (AIG.N) would sell their combined 40 percent sake in hanarotelecom inc. (033630.KQ), South Korea's second-largest broadband operator, in the near future.

Meanwhile, Hana Financial Group (086790.KS) has been locked in negotiations to buy into a small bank in China, banking sources close to Hana told Reuters last week.

Industry sources also say South Korea's top fixed-line firm KT (030200.KS) intends to absorb its mobile phone unit KTF 032390.KS once telecom regulations change. KT denied the talk.

((Editing by Marie-France Han and Kim Coghill; soyoung.kim@reuters.com; Reuters Messaging: soyoung.kim.reuters.com@reuters.net;+82-2-3704-5643)) Keywords: KOREA M&A/

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