April 19, 2024

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[THE INVESTOR] Qingdao Doublestar’s financial capability is in doubt as the Chinese tire maker has to take a massive loan to acquire controlling stake in Kumho Tire, according to media reports on April 11.

Doublestar has formed a five-member consortium with Qingdao-based investment firms for aquiring Kumho Tire. They have reportedly injected a combined 223 billion won (US$194.11 million) for the deal worth 955 billion won. The remaining 720 billion won will be leveraged from banks. 

This means, Doublestar has to pay interest of about 35 billion won annually, at the minimum interest rate of around 5 percent. Such a highly leveraged deal is raising concerns whether Doublestar would be able to bear the burden, considering its weak finances. Doublestar’s net profit stood at 9.6 billion won in 2015, while other consortium members are said to have insufficient cash reserves.

In that case, Kumho Tire would have to take on Doublestar’s debt after the deal is closed, by using its cash reserves to payback interest or increase its pay-out ratio.

In January, Korea Ratings lowered Kumho Tire’s credit assessment from A- stable to A- negative, citing Doublestar’s poor finances. “It is likely that Kumho Tire would have to shoulder Doublestar’s financial burden during the buyout process, considering its cashable assets are only worth 179 billion won,” the rating agency said.

Industry watchers are also questioning whether Doublestar will be able to operate a company that is four times larger than itself. As of end-2016, Kumho Tire’s assets are worth 5.12 trillion won, 4.2 times that of Doublestar’s 1.2 trillion won. Kumho Tire’s revenue is fivefold larger.

According to Doublestar, its revenue fell as it had to drop the operation rate to 40 percent to focus on updating and inspecting its facility since 2014. “The creditors have already conducted due diligence and no problem has been found,” an official representing Doublestar was quoted as saying in the report.

On March 13, Doublestar signed a stock purchase agreement with creditors to buy 42 percent controlling stake in Kumho Tire. The deal has not been finalized as Kumho Asiana Group Chairman Park Sam-koo can practice his rights of first refusal to buy back the tire-making unit.

However, the deal is facing uncertainty as Park has threatened to take legal action if the creditors do not allow him to form a consortium to buy back Kumho Tire. The creditors are firm on not allowing a consortium, while only agreeing to reexamine the consortium proposal if Park submits “detailed and valid” financing plans by next week.

By Ahn Sung-mi (sahn@heraldcorp.com)