KP adviser pushes for asset discount

15 September 2003 00:00  [Source: ACN]

KP Chemical's new mergers and acquisitions (M&A) adviser KPMG is attempting to persuade creditors to lower their expectations before a fourth round of bidding for the paraxylene (PX) and purified terephthalic acid (PTA) major's assets begins this October.

KPMG is targeting the end of October for obtaining indicative offers from prospective buyers. It will try to have the final offers in place by the end of December, as pressure has been mounting for a quick conclusion to the long-running divestment saga.

South Korea's Financial Supervisory Commission wants all companies under debt restructuring to have either sold or transferred ownership of their assets by the end of 2003.

However, the new M&A adviser may have an uphill task as it may have to attract fresh prospective buyers in addition to winning the argument with the creditors.

Sources close to the deal said the possibility of old contenders such as Reliance Industries, Mitsubishi Chemical and South Korean hat-maker YoungAn still being in the picture this time was low.

Mitsubishi may no longer be interested in KP because of capacity expansions at Sam Nam Petrochemical. Sam Nam, another South Korean PTA player, is owned by Sanyo Chemical (40%), Mitsubishi (40%) and LG Caltex Oil (20%). Sam Nam's capacity was raised by 400 000 tonne/year to 1.5m tonne/year in April this year.

Reliance is said to be unhappy over the price being asked by creditors.

Neither company was immediately available for comment.

Another reason why KPMG believes creditors should lower their expectations is that the timing of the fourth round of bidding is far from ideal because of weak synthetic fibre markets.

Former mergers and acquisitions adviser Ernst & Young had warned against a fourth round because of the decline in the markets.

A KP spokesman told ACN that the company had suffered an operating loss in Q2 after a decent Q1 performance. Prospects for Q3 were only 'so-so', he said. He declined to give numbers.

KP's creditors include Woori Bank, the Korea Development Bank, Kookmin Bank and the Korea Exchange Bank. The PX and PTA major has 47 creditors in total, all of them South Korean.

KP was split from Kohap Corp on 28 December 2001 as part of its debt restructuring plan.

While Kohap retained some synthetic fibre operations, all the petrochemical assets were transferred to KP.

KP's capacities comprise 700 000 tonne/ year of PX, 1.5m tonne/year of PTA and 200 000 tonne/year of PET resin.

The company's debts are estimated at Won80bn (US$68m) and its total asset value is said to be Won120bn, with a debt-to-equity ratio of close to 150%.

Little chance of early end to selling saga   

On the face of it, time seems to be running out for creditors such as those at KP Chemical,  who are holding out for the best possible deals for the assets they now control during round after round of negotiations. 

However, observers of the South Korean financial scene wonder whether there is any real pressure on the creditors to make tough decisions on divestment.    

South Korea's Financial Supervisory Commission has said it wants all companies under debt restructuring to have either sold or transferred ownership of their assets by end-2003, but an industry source told ACN he doubted whether such a ruling would be enforced.  

If that is the case, there seems to be little chance of an early end to long-running divestment sagas such as that at KP. The sticking point is the gap between the expectations of creditors and buyers. 'The creditors are looking for book value,' said the source, 'but if a potential buyer wants to buy such an asset, he will be looking for a bargain.' 

He pointed out that creditor banks or other financial institutions are carrying the burden of the company's debt without earning any interest as long as the divestment processes drag on.  

While this may be justified on the grounds that it is worth holding out for higher capital gains, it is also a way of avoiding an answer to the hard question of what the assets are really worth, and of not acknowledging their reduced value, he added. 

'To accept that assets have lost value and to sell at a lower price requires writing off debt, but somebody needs to be willing to do that,' the source said.  

He suggested that creditor financial institutions might find it easier, politically speaking, to go for the softer option of stalling on the issue - especially in a climate in which they might attract a barrage of criticism for selling at the 'wrong' price.

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