New PE Firm Targets South Korean Contractors

SEOUL (Reuters) – A new South Korean private equity fund company aims to acquire assets from the country’s unproductive defense contractors in a series of deals expected to reach nearly $1 billion, its CEO said.

Chae Do-sun, CEO of Pacific Point Ltd, told Reuters in an interview the South Korean government was also keen to spur consolidation of the domestic land military equipment sector to cut production costs and make it more competitive globally.

“The domestic military equipment manufacturing sector has been given strong government protection for a long time and, in that process, has built up a lot of redundant assets because several companies are doing similar things,” Chae said.

“Through the consolidation, much of the redundant assets can be disposed of — about 40 percent of the total even by a conservative estimate,” the West Point graduate said at his office in Seoul’s financial district on Yeouido islet.

Chae did not specify what type of assets would be subject to consolidation.

South Korea this year implemented a new law aimed at breaking down barriers between financial business areas, and analysts have said private equity funds would receive a big boost.

Chae, who has advised international acquisition deals and overseas defense contractors since the late 1990s, aims to purchase several of the country’s leading contractors in about two steps before integrating them into one entity.

He said he aims to strike the first deal around November but declined to name any of the target companies.

Leading South Korean makers of land military equipment include Samsung Techwin Co (012450.KS), Hyundai Rotem Co, which is an affiliate of auto maker Hyundai Motor Co (005380.KS), and Doosan DST.

Chae said his company has established a 100 billion won ($80.46 million) fund for the acquisition and was ready to set up a second one, to be valued at about 400 billion won, and more once progress is made.

“We have been talking with several foreign companies, including existing contractors and financial investors, based in the United States, Europe and the Middle East,” he added, again declining to name any of them.

He said the consolidation he aims for would help bring down the cost of production for South Korean land military equipment such as tanks by some 30 percent and make them fully competitive in the international markets.

South Korea spends some 9 trillion won purchasing military equipment each year, including about 5 trillion on home-made items, one source with direct knowledge of the defense spending said. ($1=1242.8 Won)

By Yoo Choonsik
(Editing by Ken Wills and Muralikumar Anantharaman)