Asset split deal

27 September 2004 00:01  [Source: ACN]

HONAM Petrochemical and LG Chem have agreed to split the Hyundai Petrochemical assets complex-by-complex because of failure to agree on asset valuations that would have enabled capacities to be divided plant-by-plant, a well-placed source told ACN. Conditions imposed by the Korea Fair Trade Commission (KFTC) were also said to be behind the decision.

The acquisition is due to be completed in January next year, when the assets are integrated into LG Chem and Honam. LG Chem and Honam formed a consortium to bid for Hyundai and had their bid accepted by creditors in late January last year. Hyundai’s sales operations have already been split between LG Chem and Honam. The sale of Hyundai ended efforts to rescue the debt-distressed producer, which began during the Asian financial crisis.

Honam will take complex No 2 at Daesan, which includes a 600 000 tonne/year cracker and 140 000 tonne/year low-density polyethylene (ldPE) and 160 000 tonne/year high-density PE/linear-low density PE units, the source added.

No 2 also includes a 240 000 tonne/year styrene plant, a 250 000 tonne/year polypropylene (PP) facility, and a 250 000 tonne/year ethylene glycol/ethylene oxide (EG/EO) unit. Honam does not currently produce ldPE, lldPE, or styrene.

One of the motives behind LG Chem agreeing to acquire Hyundai in a consort­ium with Honam was to gain more styrene capacity. LG Chem’s core products include acrylonitrile butadiene styrene (ABS), for which it has ambitious expansion plans.

The source said that Honam therefore intended to sell the output from the ­styrene plant on terms still under discussion. The output would have to be shipped from Daesan, on South Korea’s west coast, to Yeochun on the south coast and/or to LG Chem’s joint-venture plants in China. Yeochun is where LG Chem’s current operations are located.

The asset split would also mean LG Chem, through acquiring Hyundai’s No 1 complex, would enter EO/EG production. The No 1 complex includes a 450 000 tonne/year cracker, a 125 000 tonne/year EO/EG plant, a 250 000 tonne/year PP plant, a 135 000 tonne/year ldPE unit, an 80 000 tonne/year lldPE facility, a 140 000 tonne/year hdPE unit and a 150 000 tonne/year styrene plant. LG Chem is a direct producer of styrene and ldPE. Sister companies LG-Caltex Oil and LG Petrochemical are producers of PP and hdPE, respectively. The LG Group does not producer lldPE.

‘LG Chem does not want to build a position in EO/EG,’ said the source. He added that, as a result, talks were underway on selling the output to Honam. Honam will become by far the biggest domestic producer of EO/EG when the Hyundai deal is complete. Its captive production will total 650 000 tonne/year plus the offtake from the No 1 complex. Its only other domestic rival is Samsung-Atofina, also at Daesan, with 110 000 tonne/year.

The source admitted that it might well have made more sense for the complex to be divided plant-by-plant, in line with the current production slate of each of the buyers.

However, he said: ‘The gap on asset valuations was too wide plant-by-plant for any agreement to be possible. It was therefore decided that it would be simpler for LG Chem and Honam to each take one complex.

‘Another factor was the need to comply with KFTC conditions. The big antitrust concern was on polymer capacities.’

He added that three new companies would be established from January of next year to operate the Hyundai assets, one each for complexes No 1 and 2 and a third for the utilities and maintenance services. This third company will be 50% owned by Hyundai, with LG Chem and Honam each taking 25% shares.

No Ki-Ho, LG Chem’s chief executive officer, had told ACN in June of this year that LG Chem would undertake a study into expanding both crackers at Daesan (ACN 7 June 2004).

However, the source said: ‘Clearly, Honam will now have to decide whether there should be an expansion of the No 2 complex.

‘Honam might want to expand the cracker and, with it, the capacity of the EG/EO unit at No 2. But there is less potential for expansion than at No 1 because No 2 is already 600 000 tonne/year.

‘There is already surplus ethylene available from No 2, but around 60 000 tonne/year is being sold to Samsung-Atofina, with a further 60 000 tonne/year currently transferred to No 1 complex. This is very unlikely to change.’

LG Chem is eager to expand its share of the Hyundai assets in order to supply ­extra ethylene, butadiene, and styrene for its polyvinyl chloride and ABS expansions.

A chemicals analyst, reacting to the report that a deal had been reached on splitting the assets after long and complex negotiations, said: ‘I guess it can work. The major worry I would have as an investor, and this will apply no matter how the assets are split, is that each company is acquiring ldPE and lldPE assets.

‘These are highly commoditised polymers, where moving into higher value-added grades is difficult. All the higher-cost producers are going to struggle to survive in these polymers over the next few years as Middle Eastern capacity increases.’

Kumho Petrochemical has a long-standing interest in buying Hyundai’s styrene butadiene rubber and nitrile rubber capacities, which are 60 000 tonne/year and 16 000 tonne/year, respectively. This interest was restated earlier this year by Yang Kwang-Ho, vice-president of the company’s business planning and development department. Honam and LG Chem do not wish to retain these assets in the long term. – John Richardson

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