Hyundai Group financing for Hyundai E&C stake in doubt

Hyundai Group's bid to buy a controlling stake in Hyundai Engineering & Construction Co. was dealt a blow Wednesday, after a legal adviser told the stake sellers the latest financing document from the conglomerate is inadequate.

The adviser to the nine creditors-turned-shareholders of Hyundai E&C reviewed the document provided by Hyundai Group—a letter of guarantee from French bank Natixis rather than the requested loan contract—before determining it was insufficient, an official from Korea Exchange Bank said.

Hyundai Group has arranged a 1.2 trillion won ($1.04 billion) loan from Natixis to help finance the purchase the 34.88% stake in Hyundai E&C from the creditors, led by KEB.

The creditors will hold a formal meeting Friday to decide their next step, to be taken by Wednesday.

The creditors have repeatedly threatened to walk away from the current agreement to sell their stake to Hyundai Group should the conglomerate fail to provide sufficient information on how it plans to finance the transaction.

In mid-November, Hyundai Group was named a preferred bidder for the stake over heavily favored cash-rich rival Hyundai Motor Group. A memorandum of understanding for the deal was signed later that month and people familiar with the situation said Hyundai Group bid 5.51 trillion won for the shares while Hyundai Motor bid 5.1 trillion won.

The creditors had given Hyundai Group until end of Tuesday to submit all documentation for the 1.2 trillion won loan, including the loan contract.

Analysts and the market at large have questioned whether Hyundai Group, whose three key affiliates have a combined market capitalization of 8.25 trillion won, can afford the deal. Hyundai Group affiliates' shares have fallen sharply whenever it appeared that Hyundai Group was closer to clinching the deal.

While both Hyundai Group and Hyundai Motor have said acquiring Hyundai E&C would create tangible synergies with their existing businesses and provide a growth engine, analysts and the market haven't been convinced. Instead, the competition between the two conglomerates has been widely perceived as a dispute over the two groups of former affiliates over a symbolic piece of family history.

Hyundai E&C, founded by Chung Ju-yung in 1947, was the founding piece of the Hyundai Group. The company was once the country's largest conglomerate but lost many of affiliates in the wake of the 1997-1998 Asian financial crisis because its business model relied heavily on debt and focused on sales growth rather than profitability.

Chung Mong-koo, Hyundai Group founder's second son, is chairman of Hyundai Motor. Hyundai Group Chairwoman Hyun Jeong-eun is founder Chung's daughter-in-law. The construction firm and the two conglomerates, although they share a name and a common heritage, currently have no direct links.

Analysts said Hyundai Group's strong bid also reflects its determination to protect itself from potential hostile takeovers. E&C holds a 8.3% stake in Hyundai Merchant Marine, a key component in the Hyundai Group's cross-shareholding structure. Losing that 8.3% stake, analysts say, poses a significant threat to Hyundai Group's ability to hold itself together.