Daewoo Split: Painful But Necessary

The splitting of Daewoo Heavy Industries Co., the shipbuilding and machinery unit of South Korea's ailing Daewoo Group, into three firms should boost shareholder value, analysts said. A shareholders meeting earlier in the week approved a plan to split the company into Daewoo Shipbuilding and Marine Engineering Co., machinery maker Daewoo Heavy Industries and Machinery Ltd., with Daewoo Heavy Industries Co. taking the remaining operations. Daewoo Heavy is among the 12 Daewoo Group firms put under a creditors-led debt restructuring program in late August last year as the group was teetering on the brink of insolvency.

"The split of Daewoo Heavy is a painful but inevitable choice for shareholders," said an analyst at Daishin Securities. "They would stand to benefit from increased corporate values eventually."

A Daewoo Heavy spokesman said company president Shin Young-kyun declared the plan was approved at the meeting amid strong objections by some minority shareholders.

"The declaration takes effect legally and the approved plan would go into effect as of May 1," he said.

Of the company's current paid-in capital of 1.84 trillion won, Daewoo Shipbuilding will be allotted 9.95 percent, Daewoo Heavy Industries and Machinery 9.39 percent and Daewoo Heavy Industries Co. the remaining 80.66 percent, the spokesman said.

But the paid-in capital of the first two companies would be sharply expanded later through debt-for-equity swaps by their respective creditors, he said.

Analysts said the shipbuilding and machinery units would be reborn as clean companies, while Daewoo Heavy Industries Co. would become a paper company, shouldering most of the company's debts.

Daewoo Heavy would eventually be liquidated in four or five years once it settles its internal debt issues, said an official at the company's main creditor, Korea Development Bank. The latest due diligence inspection by independent auditors has put Daewoo Heavy's assets at 12.15 trillion won, slightly outpacing its liabilities of 11.3 trillion won.

The division of the liabilities among the three firms would be decided after creditors of Daewoo affiliates settled the issue of inter-subsidiary debt guarantees.