Goldman Sachs leads $400m investment in Korean gas producer

It is the first Korea deal completed by the investment bank's private equity unit since the previous local team spun out to form Anchor Equity Partners. Korea activities are now led by Stephanie Hui, the Goldman partner who also heads up China, while Jay-Hyun Lee, previously a banker at the firm, has been brought in to explore new investment opportunities.

The consortium will own approximately 68% of the gas business on a fully diluted basis, but existing management will remain in place. Other investors include Min-Joo Lee, ex-chairman of cable TV provider C&M Communications. Goldman was an investor in C&M for three years, helping the company complete several bolt-on acquisitions before exiting to a consortium led by MBK Partners and Macquarie.

The deal reflects a key element of Goldman's revised Korea strategy - partnering with conglomerates that have strong assets but are looking for ways to service debts arising from mistimed investments in construction.

Daesung has interests spanning energy, machinery, construction, telecom and consumer, as well as industrial gases. Listed unit Daesung Industrial, which is responsible for much of the group's energy, construction and machinery operations, posted a net loss of KRW304 billion ($300.7 million) in 2013, more than double the previous year's deficit.

However, the privately-held gas business is in better health, with KRW436 billion in revenue and KRW95 billion in EBITDA for 2013, and historical EBTIDA margins of more than 20%. It is the number one industrial gas producer in Korea by capacity and ranks second in terms of revenue.

Daesung has a one-time call option on the consortium's stake in 2018 at a pre-determined valuation multiple. This would allow the group to reclaim control of the business once the problems in other subsidiaries are resolved.

According to a source familiar with the situation, should the option not be exercised, there are plenty of strategic buyers that may be interested in the business. The company supplies general industrial gases and specialty gases to the consumer electronics, semiconductors, steel and petrochemicals industries, with customers including Samsung Electronics, SK Hynix and LG Display.

Other private equity firms have also managed to secure assets from Korean conglomerates that need capital to bail out distressed subsidiaries. MBK Partners and Korea Telecom acquired Kumho Rent-A-Car in 2010 from Kumho Asiana, which found itself in difficulty following the highly leveraged purchase of Daewoo Engineering & Construction in 2006 by Kumho Industrial. More recently, MBK bought water purifier manufacturer Woongjin Coway from bankrupt Woongjin Group. The parent company had invested heavily in solar energy at a time when its construction and finance unit were struggling.

Vogo Investment took a minority position in Tong Yang Life Insurance in 2006 with right of first refusal should parent company Tong Yang Group decide to sell any more. This duly happened in 2010 as Tong Yang was forced by creditors to divest non-core assets in order to finance debt repayments.

Goldman Sachs has been investing in Korea since 1999 when it bought a minority stake in Kookmin Bank, which subsequently merged with Housing & Commercial Bank to create the country's largest lender. Current portfolio companies include CS Wind, a global wind tower manufacturer that is looking to go public later this year.

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• Topics
• Buyouts
• North Asia
• Industrials
• Goldman Sachs
• buyout
• manufacturing
• South Korea