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September 7, 2005 4:24 pm

Big success brings a big price at Hynix

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Is Hynix too big to sell? That is the question vexing creditors of the memory chip giant, as they speed up the process of offloading shareholdings in the South Korean chipmaker, encouraged by its successful turnround.

Hynix is no longer a crisis-ridden company. Helped by tough restructuring and a recovery of the volatile chip market, the company has made a strong comeback, posting a record net profit last year.

It has become one of the most cost-efficient chipmakers, in spite of several years of under-investment, by making the most of its workforce and existing facilities. It has overtaken Micron as the world’s second-largest chipmaker, with a 16.4 per cent market share, just behind rival Samsung Electronics. It is a remarkable turnround, industry watchers say. “They understood they were in a bit of a crisis as a company, and that was something they used as a rallying point to rebound,” says Michael Zink, senior executive vice-president at Citibank Korea. “During this period where they had some financial challenges, they focused on what could be done. They had a clear path to recovery.”

Hynix completed its debt-workout programme in July by refinancing $1.25bn debt, freeing it from management by its creditors. Now the company is back on its feet, creditors are eager to recoup some of the $4.6bn they injected in Hynix in a series of bailouts in 2001/02.

Creditors named seven lead managers this week to sell about a third of their 73.8 per cent stake as early as next month. People close to the stock sale expect it to be well received by investors, but the prospect of selling the remaining 51 per cent stake is not so bright, analysts say. Creditors plan to sell the stake after the lock-up period ends at the end of 2007, but are willing to divest their investments even before 2008 if a strategic buyer emerges.

“It is an attractive company. So we believe it will draw a lot of interest from prospective bidders,” says Lee Nahm-yon, a spokeswoman for Korea Exchange Bank, Hynix’s main creditor.

Already a military pension fund has expressed interest, but has ruled out making a solo bid because of the financial burden.

Analysts say it will not be easy to find a strategic buyer, given the company’s huge market value and the unclear business outlook. “There will be a number of interested parties, but the problem is the company has become too expensive,” says Michael Min, analyst at Korea Investment & Securities.

Its share price has almost quadrupled to Won21,700 since the end of 2003. Analysts estimate it will cost at least $3bn to secure management control of the company, as its total market capitalisation amounts to $10bn, and there are not many buyers who can fund such a big acquisition.

Analysts say LG Electronics may be among the candidates because it was forced to hand over its semiconductor business under a government-led shakeup. “Considering that LG is an electronics maker, the company may want to have memory chip business back to boost its digital appliance business,” says an industry analyst. LG has strongly denied the possibility.

Another candidate mentioned in local media is STMicroelectronics, Europe’s biggest chipmaker. STMicro has sought to expand its alliance with Hynix beyond their joint venture in China. They are building a $2bn chip plant together, but analysts say STMicro is likely to remain a strategic partner.

“It won’t be easy to find a strategic buyer, who is willing to take a risk because producing memory chips is a highly cyclical and capital-intensive business,” says an analyst at a Japanese brokerage. “The potential buyer has to make additional investments to upgrade Hynix’s aging facilities in order to maintain its competitiveness.”

Although Hynix has increased the portion of premium products such as flash memory chips, the company remains vulnerable to the industry’s volatile price swings. “It has become a pure memory maker after selling its non-memory business. And it can be a problem once the industry cycle turns down,” says Kang Sang-wan, an analyst at Lehman Brothers.

Hynix suffered a drop in second-quarter profit as memory chip prices tumbled amid a supply glut. But profitability is likely to improve in the current quarter and the next with chip prices rebounding on strong seasonal demand.

Analysts say Chinese companies will be eager to buy Hynix. But creditors, mostly state-backed Korean banks, are reluctant to sell the company to China because of worries about technology outflow. They expect Hynix to be sold eventually to a consortium of domestic private equity funds or other financial investors.   

For Hynix officials, the issue of who will be the new owner of the company does not matter as long as management can make independent business decisions.

“Our hope is to have management separated from ownership. We want to continue to have a professional manager, who can make rational decisions fast,” says Kim Jung-soo, a director at the investor relations team.   

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