Posco Buys Daewoo International Stake for $2.8 Billion

SHANGHAI, Aug. 30 -- Posco, the third-biggest steelmaker, agreed to buy control of Daewoo International Corp. for 3.37 trillion won ($2.8 billion) to expand its sales network and gain raw materials as prices climb.

Posco will acquire 68.15 percent of the steel and crude oil trader, the Pohang-based steelmaker said in a regulatory filing today. The purchase price of 49,101.5 won a share is 53 percent higher than Daewoo International’s close on Aug. 27, based on figures derived from the statement.

Chief Executive Chung Joon Yang is making his biggest purchase as base metal and oil prices soared as much as 68 percent in the past five years because of rising demand from China. The 62-year old executive is spearheading a $30 billion capacity expansion plan in countries including India and Indonesia.

"Daewoo’s expertise in resources development will help Posco invest in mines overseas,” Shin Yoon Shik, an analyst with Meritz Securities Co. in Seoul, said by phone today. “Posco will benefit from Daewoo’s overseas sales networks as the steelmaker has to secure clients for its increasing output.”

Posco shares rose 2.5 percent to 496,500 won at 10:58 a.m. in Seoul trading. Daewoo International gained 2.2 percent to 32,700 won. Posco, which counts Warren Buffett’s Berkshire Hathaway Inc. as a shareholder, has dropped 21 percent this year as costs of steel-making materials gained.

Preferred Bidder

The transaction will be completed by the end of September, Korea Asset Management Corp., a state-run agency leading the stake sale, said today. On May 14, the mill was chosen as the preferred bidder for a controlling stake in Daewoo, beating Lotte Group, the nation’s biggest department-store operator.

The acquisition “will help strengthen our competitiveness and increase synergy between Posco and related affiliates,” Posco said in the regulatory filing.

Daewoo International owns stakes in a nickel mine in Madagascar, a coal mine in Australia and an oil block in Vietnam. The nickel reserves are estimated at 125 million metric tons, one of the world’s four biggest. It also operates a natural gas project in Myanmar.

Chung agreed this year to buy as much as 15 percent of the Roy Hill iron ore project in Australia and 7.8 percent of a coal mine in Mozambique. The company in July also agreed to buy a 24.5 percent stake in the Australian Premium Iron project in Western Australia and Posco’s Australian unit in the same month increased its shareholding in Murchison Metals Ltd. to 13.91 percent, making it the iron ore miner’s largest shareholder.

Vale SA and BHP Billion Ltd. this year broke with a tradition of setting annual prices for iron ore and coal, securing two price gains for quarterly contracts from mills.

Steel Trading

Daewoo gets 98 percent of sales from trading, with steel and metal accounting for 60 percent. The trader, which also runs a shopping center and sells automobile parts, handles about one quarter of Posco’s steel exports.

Daewoo International posted 11.1 trillion won in sales last year, with net income up 42 percent to 124.6 billion won. Posco, which earns about 70 percent of sales in the domestic market, posted 3.2 trillion won of profit last year.

Samjong KPMG Advisory Inc. and Bank of America Merrill Lynch are arranging the sale. Macquarie Group Ltd., Woori Investment & Securities Co. and Shinhan Investment Corp. are advising on Posco’s bid, the steelmaker said in December.

Posco is the world’s third-biggest steelmaker by production, ranked after ArcelorMittal and China’s Baosteel Group Corp., according to the World Steel Association website. According to the American Institute for International Steel, the Korean steelmaker is No. 4, coming after ArcelorMittal and China’s Hebei Iron & Steel Group and Baosteel.