Investigated Posco E&C hopes to close share sale with SaudisPosco, which is under investigation for its construction arm’s alleged slush fund in Vietnam, is worrying that some of its overseas businesses might be impacted, particularly in Saudi Arabia.
After becoming the new chairman of Posco a year ago, Kwon Oh-joon has carried out a series of reforms to improve the group’s financial solvency to overcome a global slump in the steel industry.
Posco’s operating profit for last year was only 3.21 trillion won ($2.84 billion), which was nearly half the 7.17 trillion won operating profit in 2008. Posco’s cashable assets were reduced from 8.5 trillion won in 2008 to 6.2 trillion won last year, according to the company.
The biggest business concern for the group is Posco Engineering and Construction (E&C), which is suspected of creating a slush fund of more than 10 billion won in Vietnam.
As part of Kwon’s restructuring, Posco wanted to sell portions of its stake in Posco E&C since last September. It eventually received an eye-popping proposal from the Saudi Arabian government earlier this month.
The proposal was for a Saudi Arabian sovereign wealth fund called Public Investment Fund (PIF) to purchase a 38 percent stake of Posco E&C, which is worth about 1.2 trillion won, on the condition that Posco and the Saudi Arabian government establish a joint construction venture.
On March 4, when Kwon visited Saudi Arabia with President Park Geun-hye, Posco and PIF signed a memorandum of understanding that stated the two sides would cooperate with each other in various industries including construction and car businesses.
The joint venture is expected to manage a project building a 1,400-kilometer railway connecting Saudi Arabia’s capital Riyadh to Jedda. Posco had planned to finish the stake sale by the end of April.
But there are now worries that the value of Posco E&C shares might fall and that the deal might collapse.
In the past 12 months, Kwon pursued 30 restructuring plans including selling unnecessary affiliates, and 11 of them were completed. Posco made 600 billion won by selling its 52.5 percent stake of Posco Specialty Steel to SeAH Besteel. Posco is also currently working on selling Posco-Uruguay and its stake in Gwangyang LNG Terminal.
At a shareholders’ meeting last week, Kwon said Posco made 2 trillion won in cash through the 11 completed restructuring plans, and will try to make an additional 1 trillion won by completing 20 more by the end of this year. Kwon said Posco is aiming at 67.4 trillion won in sales this year on a consolidated basis and a net profit of 2 trillion won.
It is important for Posco to finalize the deal with Saudi Arabia as it also has a plan to build a car plant in Saudi Arabia worth $1 billion.
Saudi Arabia has wanted to build a state-run car plant that can produce about 150,000 units of 2,000- to 2,400-cc cars every year. Posco’s trading arm Daewoo International will manage the overall car manufacturing process, while Posco will supply car steel sheets and Posco E&C will build the plant.
Saudi Arabia wants to be the first nation to produce cars in the Gulf Cooperation Council. It is also a golden opportunity for Posco E&C to expand its business in the Middle East, where the company has won only $1.5 billion won in contracts up to last year.
“The company will try to cooperate with the prosecution’s investigation to reduce any damage it could have on the group’s businesses,” Kwon said in a meeting with executives Monday.
BY KWON SANG-SOO [firstname.lastname@example.org]