Private equity firms flex muscle in South Korea

SEOUL (Reuters) - Foreign private equity funds, which had kept a low profile in South Korea in recent years amid fears of a backlash, are stepping up their hunt for bargains again as cash-strapped conglomerates look set to sell juicy assets.

Foreign private equity firms have been cautious on South Korea since U.S. investment firm Lone Star's purchase of a stake in Korea Exchange Bank in 2003 fueled heated criticism about the huge profits foreigners could reap from distressed Korean assets.

The Lone Star deal quickly became a political football, and is still being dragged through the courts.

Now, however, foreign private equity funds like CVC and Affinity Equity look set to test the waters again, banking on the new government's friendlier disposition to foreign capital.

The slumping won is also making South Korea more attractive to outside buyers, while local business groups, once strong competitors, have been hobbled by the country's financial woes.

"The first and second quarters of next year will start to see more volumes of M&A activities," said Gunny Cho, an executive director of KTB Securities' M&A team.

"Conglomerates are selling because they need cash. They are not distressed assets but distressed sellers."

M&A transactions involving private equity firms in South Korea have more than doubled to $3.6 billion in value so far this year from a year earlier, according to Thomson Reuters.

Mid-sized conglomerates, including the Kumho and Hanwha groups which had respectively clinched high-profile deals such as Daewoo Engineering (047040.KS) and Daewoo Shipbuilding (042660.KS), are planning to sell assets to finance those deals.

Two weeks ago, private equity fund MBK Partners signed a 400 billion won ($271 million) agreement to buy a packing unit of South Korea's Doosan Corp (000150.KS).

Doosan's parent group bought Bobcat, the world's top compact construction equipment firm and other assets from Ingersoll-Rand (IR.N) for $4.9 billion in 2007.

Analysts say some debt-laden chaebol, or family-run business groups, may have to abandon core assets to survive.

Eugene Group, which had been in aggressive acquisition mode until January, is putting Eugene Investment (001200.KS) up for sale after it bought the securities company in 2006.

STX Group, which acquired total control over Europe's biggest shipbuilder Aker Yards AKY.OL this year, may consider selling small stakes in the European firm, an STX spokesman said.

MORE OPENNESS

Listed companies of South Korea's top 30 conglomerates had a combined 50 trillion won in debt at end-September, a 59 percent increase from a year ago, according to an online portal site offering financial data on conglomerates. (www.chaebul.com)

Out of the total, borrowings with less than 1 year of maturity soared 75 percent to 29 trillion won, indicating many firms will have to find cash soon to repay that debt.

South Korea is a proven market for private equity investors, including Newbridge Capital NB.UL and the Carlyle Group CYL.UL, which have more than doubled returns from South Korean assets they bought in the wake of the 1997-98 financial crisis.

But since 2004, they had been replaced by domestic conglomerates that offered hefty acquisition premiums.

The backlash against Lone Star LS.UL has also made foreign buyers wary, but a court ruling this week signaled its long, bitter legal battle may be nearing an end.

A Seoul court on Monday rejected claims Lone Star's KEB deal was illegal, injecting a note of relief among foreign investors despite expectations government prosecutors will appeal.

"You're starting to seen more government openness and seeing policies implemented that will encourage more foreign investment," said a top M&A banker in Hong Kong, who declined to be identified because he was not authorized to speak to media.

Still, private equity managers say price differences over potential targets remain wide, with buyers waiting for further declines in valuations.

A senior partner of a private equity fund said private equity houses, which have raised funds in dollars, seem willing to pay more than domestic bidders on expectations that the weaker won, now near a decade low, would boost currency gains when they sell the assets and repatriate their profits back home.

He said private equity funds were focusing on snapping up solid companies at cheap prices and selling them back in three years' or so for a decent sum when the economy turns around, rather than planning huge longer-term investments.

Consumer goods makers, seen as less vulnerable to economic cycles, financial services companies and pharmaceutical firms look attractive in the economic downturn and ahead of prospective consolidations in those sectors, private equity managers say.

The size of any new deals will likely be smaller than a few years ago, reflecting diminished expectations for future cash flows and reduced availability of credit for highly-leveraged deals in the wake of the global financial crisis.

But returns on domestic assets should be higher than previous deals' average in the "high teens," KTB's Cho said.

(Additional reporting by Michael Flaherty; Editing by Marie-France Han and Jonathan Thatcher)