Copyright (c) 2005, Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.FOREIGN INVESTORS in South Korea are growing worried that an antiforeign backlash will block them from winning deals. But increasingly, foreigners face an equally big hurdle: Korean companies are becoming much tougher competitors for acquisitions.
Across South Korea, companies are in expansion mode. They have recovered from the devastation of the Asian financial crisis in the late 1990s and are now using their proximity to China and Japan to build their businesses and their exports, even as weak domestic consumption saps local growth. The recent victories by two South Korean companies in sealing big acquisitions show how these firms have built up their capital and are willing to use it. In both cases, the companies outbid rivals by wide margins.
There once was a time when few but the bravest private-equity funds considered investing in South Korea -- and they did so only in exchange for a deep discount. Korea's economy was in tatters after the crisis, and its corporate and financial sectors in disarray. The funds turned businesses around and resold them to strategic buyers for several times what the funds had paid. Carlyle Group last year more than doubled investors' money when it sold a stake in South Korea's KorAm Bank to Citigroup Inc. More recently, Newbridge Capital reaped three times its investment in Korea First Bank, which it sold this year to Standard Chartered PLC for $1.6 billion.
Now, however, those profits are sparking a public outcry, and the government has taken steps to favor local investors. Seoul recently changed tax regulations to encourage the development of local private- equity funds. Last week, the central bank's research arm called on regulators to spur local investment in South Korean banks and financial institutions.
In this climate, the sale of Jinro Ltd. after the company went into receivership became one of the most closely watched transactions so far this year. The largest maker of soju, a popular alcoholic drink, Jinro is a national icon in South Korea.
The court set a high bar for private-equity bidders. It required a buyer to purchase new shares of the company for cash, with creditors receiving debt repayment at full value. The court also made buyers put down a deposit of 10% of the purchase price, according to some of the bidders, a challenge for private-equity funds. In addition, it wasn't clear that the court would allow potential buyers to pledge Jinro's assets for loan collateral, which made a traditional leveraged buyout unworkable.
Still, J.P. Morgan Partners jumped in. Another private-equity shop, CVC Asia Pacific Ltd., issued one of the highest offers, while Newbridge, Affinity Equity Partners and several small soju makers also teamed up in a bid estimated at $2.3 billion to $2.5 billion, bankers said.
No one involved had expected South Korea's Hite Brewery Co. to launch a serious offer. For one thing, the company, which commands 58% of the country's beer market, didn't seem to have the financial backing needed for a competitive bid. Yet Hite Brewery beat out eight other rivals, agreeing to pay about $3 billion.
The size of Hite's bid dwarfed concerns that foreign investors had been disadvantaged. As one private-equity executive put it, "We lost because we didn't pay the highest price -- not because we're not Korean."
Hite's victory showed how local Korean companies can have an edge over foreign investors even without antiforeign measures. Private- equity funds usually seek returns of at least 25% on their investments, while corporate buyers, such as Hite, often want to expand their businesses, squeezing out savings by combining operations.
The Jinro purchase -- which still requires a blessing from South Korea's Fair Trade Commission -- will give Hite a dominant share of the soju market in Seoul, South Korea's largest city.
In another high-profile deal, Daewoo Heavy Industries & Machinery Ltd.'s auction by creditors drew a bevy of interested parties at home and abroad, including Carlyle Group and J.P. Morgan Partners. Korea Asset Management Corp., the country's corporate-restructuring organization, didn't permit foreign investors to bid for the company's defense division, citing national-security concerns. At the same time, the state-run entity indicated it would give preference to bidders that could purchase the entire company. Taken together, some complained, the two conditions made it difficult for foreign private- equity funds to compete.
In the end, those concerns proved moot. Doosan Construction & Engineering Co., a unit of Doosan Corp., agreed to pay $1.67 billion. Some foreign investors thought that price was too high. But for Doosan, Daewoo Heavy promises to bring technology and access to Daewoo Heavy's strong overseas marketing, particularly in China.
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Kate Linebaugh and Seah Park contributed to this article.
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