Hyundai E&C announces the merger of affiliates

Hyundai Engineering and Construction, the nation’s largest builder and part of Hyundai Motor Group, said in a regulatory filing on Thursday that it has decided to merge construction affiliates Hyundai Engineering and Hyundai Amco, a move many speculate could pave the way for Hyundai Motor Vice Chairman Chung Eui-sun’s ascent to the group’s top position.

Hyundai E&C said Hyundai Engineering will absorb Hyundai Amco, with a merger swap ratio of one to 0.178. The newly integrated builder, whose name has not been decided, will be ready for business in April.

Hyundai Motor Group said the move is part of its plan to raise the competitiveness of the group’s construction sector and create synergy, emphasizing the merger is in line with the recent Hyundai Steel acquisition of Hyundai Hysco.

Hyundai Engineering, in which Hyundai E&C has a 72.5 percent stake, focuses on design and construction of petrochemical plants. Hyundai Amco, which was established in 2002 and ranks 13th in construction capability, specializes in civil engineering and residential and commercial construction.

The new company would be the nation’s eighth-largest builder in terms of sales. As of last year, combined sales of the two companies reached 6 trillion won ($5.6 billion) and assets totaled 4 trillion won.

Industry insiders originally speculated the bigger Hyundai Amco would absorb Hyundai Engineering, but it turned out the other way because Hyundai Engineering has the higher stock value. Observers, however, said this decision is a move to funnel cash to Vice Chairman Chung, the only son and potential heir of Hyundai Motor Group Chairman Chung Mong-koo, by having him take control of Korea’s second-largest conglomerate through an initial public offering (IPO) of the merged builder.

Hyundai Motor Group has a circular shareholding structure (Hyundai Mobis to Hyundai Motor to Kia Motors to Hyundai Mobis), but the vice chairman has only a 0.67 percent stake at Hyundai Mobis, which is considered a de facto holding company for Hyundai Motor Group. His stake in Kia Motors also is about 1.74 percent, while he has almost no stake in Hyundai Motor.

Insiders speculate that in order for Chung to acquire Kia’s 16.9 percent stake at Hyundai Mobis, more than 5 trillion won is needed.

“At this moment, a very possible scenario will be pursuing an IPO of the new merged company and selling Chung’s share within that company to raise cash that eventually will be used to acquire Hyundai Mobis shares,” a local analyst said on the condition of anonymity.

Once the merger is completed, Chung will be the second-largest shareholder of the new company with 11.7 percent, with No. 1 Hyundai E&C having a 38.62 percent stake. Chung was the largest shareholder in Hyundai Amco with a 25.06 percent stake.

Analysts say it is unlikely that Hyundai Motor Group will attempt to merge the new builder with its largest shareholder, Hyundai E&C.

“Hyundai Motor owners [Chung and his father] are expected to earn 566.5 billion won through an IPO of the merged builder, and if that new entity were to merge again with Hyundai E&C, they could get 570.1 billion won, which makes no big difference,” said Byung Sung-jin, an analyst at Mirae Asset Securities. “Considering the cost of a re-merger and the difficult process of getting approval in the shareholder’s meeting, it will be better not to pursue merging with Hyundai E&C.”

BY JOO KYUNG-DON [kjoo@joongang.co.kr]