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Like the phoenix, Dongbu keeps rising from its ashes

After several crises, conglomerate and its chairman are survivors

July 08,2014
Only a couple of chairs, a desk and small windows decorate the 108-square-foot office of Dongbu Group Chairman Kim Jun-ki.

This is where Chairman Kim works - on the 34th floor of Dongbu Financial Center in Teheran-ro, the center of Gangnam District.

People say Kim, 70, is a workaholic. For executives of Dongbu Group, the nation’s 18th-largest conglomerate, talking with him on the phone for an hour is not uncommon. They are also accustomed to meetings that last four hours or more. Last month, they stayed overnight for a meeting as creditors intensified their efforts on debt restructuring.

In fact, Kim calls himself an “industry farmer,” looking for the best seeds (investment opportunities) and then watching them grow.

Kim’s Dongbu Group recently secured some breathing room in its liquidity crisis. Dongbu CNI, a de facto holding company for the group’s manufacturing businesses, said last Friday it will have 63.5 billion won ($62 million) in cash after selling its 22.67 million shares to Kim Ju-won and Kim Nam-ho, the daughter and son of the chairman.

Dongbu CNI will use the money to pay 50 billion won in corporate bonds. About 20 billion won was due yesterday and 30 billion won was due on Monday.

In addition, Dongbu Steel, the nation’s fourth-largest steelmaker, began its voluntary agreement with creditors yesterday. The company can now anticipate a debt-for-equity swap, extension of payment deadlines or additional financial support from creditors.

However, in exchange, Kim may lose his management power as creditors reportedly are considering a capital reduction that would diminish his share in the company. Creditors said that they will select an accounting firm and conduct due diligence for the next few months to determine the exact value of the company.

After Posco, the nation’s largest steelmaker, rejected an offer to buy Dongbu Steel’s Incheon plant and Dongbu Dangjin Power Corporation on June 24, the liquidity problem of Dongbu Group resurfaced, but it seems to be easing.

Dongbu Group has been through several crises since the 1997 Asian financial crisis. This time, Dongbu Steel ate up 1.5 trillion won for an electric furnace. Before that, the semiconductor business was the problem.

But for Kim and Dongbu, there were opportunities to turn around the situation.

In 2008, France’s Eramet offered to buy Dongbu Alloy Steel (now Dongbu Metal) for about 1.3 trillion won. Dongbu was the world’s second-largest alloy steel producer, but Kim rejected the offer because it was too low. The sales talk abated during the global financial crisis later that year.

There were also chances to acquire good companies. When Hynix Semiconductor was for sale, creditors contacted LG, Hanwha and Hyosung to no avail. Creditors offered Dongbu an opportunity to invest 1 trillion won in Hynix and promised full management control. Kim said no. Since then, Dongbu has been investing in non-memory semiconductors.

But Hynix, which was acquired by SK in 2011 for 3.4 trillion won, turned out to be a gold mine. The company last year had sales of 14.1 trillion won and operating profit of 3.3 trillion won.

Dongbu also attempted internal restructuring that didn’t go well. From the mid-2000s, Kim has been recruiting Samsung executives to implement Samsung Group’s management style. At one time, a third of Dongbu executives were from Samsung, but industry observers say there have been divisive tensions with existing executives.

Lost business opportunities in the past don’t mean Dongbu is doomed. Even creditors say it is not like Tongyang or STX Group, which disbanded after liquidity crises. As sales of some of manufacturing affiliates are completed, many industry insiders believe Dongbu Group will survive.

The group said Dongbu Dangjin Corporation is still an attractive company that guarantees a 10 percent operating profit ratio, while Dongbu Steel has attracted interest from some Chinese companies. The sale of Dongbu Metal also is being discussed with its main creditor, Korea Development Bank.

“Although it was founded about 30 years later than Samsung or Hyundai, Dongbu is the only one that survived with this size of conglomerate,” says Kim Kyeong-jun, CEO of Deloitte Consulting. “It’s distinctively different from second-generation chaebol like Daewoo, Yulsan, Byeoksan and Hanil, which all fell apart.”

While Dongbu will keep looking for buyers, it is unknown if the group will accept creditors’ request to use Kim’s first son’s share in Dongbu Insurance as collateral for carrying out the restructuring plan. Dongbu believes its crisis should not be linked to financial companies.

According to the Financial Supervisory Service (FSS), Kim’s son and daughter have borrowed 352.8 billion won with their shares in Dongbu Insurance as collateral. The value of those shares is estimated at 650 billion won.

Loans with shares as collateral usually account for 50 percent to 70 percent of the total value of the collateral. While creditors think Dongbu can get more cash, Dongbu says the loan limit of the collateral has been reached.

BY LEE SANG-JAE, JOO KYUNG-DON [kjoo@joongang.co.kr]







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