PKX to Acquire Daewoo International – Analyst Blog

Korean steel maker, POSCO (PKX) signed an agreement with the creditors of Daewoo International Corp., an energy developing company, for the acquisition of a 68% stake (or 68.7 million shares) by the end of September 2010. The transaction value of KRW 3.37 trillion is 2.5% lower than POSCO’s original offer of KRW 3.46 trillion.

 

The total 68% stake in Daewoo International is jointly held by state-run Korea Asset Management Co (KAMCO), The Export-Import Bank of Korea, Korea Development Bank and other creditors. Among these KAMCO alone holds approximately 35.5% stake in Daewoo International.

 

POSCO plans to take no loans for the acquisition and pay the entire amount in cash. The acquisition will enable POSCO to grow its businesses, secure a stable source for procurement of raw materials and strengthen its foothold in the overseas markets.

 

POSCO is the world’s third largest steelmaker, manufacturing primarily for the shipping and construction industries. The company has been growing internationally through its investments in Australia (70% share in Sutton Forest coal mine and 24.5% in API Iron Ore mine), China (contract with Jilin Province and manufacturing of processing centers), India (Orissa project and joint venture with SAIL), Indonesia (Krakatau steel project) and Brazil (20% stake in Brazilian steelworks project together with Tongue Steel Mill and Vale).

 

POSCO anticipates that global steel demand will grow 12% in 2010 due to continued economic recovery with domestic requirement rising by 16%.

 

Despite being endowed with benefits from regional diversification, POSCO’s operating performance in the quarters ahead would probably be influenced by higher raw material costs, increase in Chinese steel exports and falling spot prices for steel in China due to declining domestic iron ore costs. Moreover, higher debt caused by enhanced investment activities together with risks from volatility in foreign exchange and the cyclical nature of the industry will be detrimental to the company’s financial results.