Renault Will Buy Ailing Car Maker Samsung
French auto maker Renault agreed on Friday to buy ailing Samsung Motors for a reported $540 million to $550 million, marking the first time a foreign company has gained a foothold in the protected South Korean car market.
The deal expands Renault’s tire tracks in Asia at relatively low cost and maintains Samsung’s name in the marketplace.
“This looks like quite a favorable deal for Renault,” said Howard Smith, analyst with ING Barings.
But it could face flak in Korea, given that country’s history of economic nationalism. Auto unions earlier this month staged a nine-day, nationwide strike over the likelihood that Ford, General Motors or another outsider will buy part or all of ailing Daewoo Motors. They’ve also threatened to leave work again next month.
That said, Samsung is smaller, more marginal and seen as less of a national icon than Daewoo Motors, reducing the chance of a labor standoff, analysts say. Samsung Motors has also had no Korean suitors, or in fact anyone else interested in taking over.
“This is good news,” said Richard Samuelson, Korean research director with Warburg Dillon Read. “It’s a production facility that needs to be integrated into a larger group and is not economically viable.”
With this deal, Renault is entering one of the most protected auto markets in Asia.
South Korea sold just 2,401 foreign cars in 1999 and is the subject of both U.S. and European trade pressure to liberalize. Renault said recently it hopes to gain at least a 10% share of the market, which is largely controlled by Hyundai Motor and its sister firm Kia Motors.
Renault’s strong bargaining position on Samsung is reflected in the price it will pay creditors--about half what they originally asked for--and the structure of the deal. According to Korean media reports, Renault will only put up about $100 million in cash to acquire 70% of the company. Another $240 million is in the form of debt, most of which Renault can pay back over a decade, interest-free. The remaining $200 million will be funded out of Samsung Motors’ operating profit, assuming there is any.
Creditors, who are expected to ratify the deal Monday, will acquire a 10% stake while the Samsung Group keeps 20%.
Korea’s vehicle market suffers from enormous overcapacity, and Samsung was the most extreme case of ill-conceived expansion plans. The car company was started at the peak of the market, driven largely by the Samsung Group chairman’s love of cars.
Although Renault has its hands full restructuring Nissan Motors, the big Japanese auto maker it recently took control of, the Samsung deal is attractive on a couple of counts.
Short-term it gives the former state-owned French company a conduit to sell its Renault, Nissan and Samsung vehicles to South Korea’s 45 million consumers. After suffering a meltdown in 1998, the Korean market is growing and expected to sell a million cars this year.
And longer-term, it offers a teaser in the form of lower costs and better economies of scale. Samsung Motors’ ultra-modern plant in the southern city of Pusan makes cars based on Nissan technology. If Japan’s market picks up and Nissan is successful in rejuvenating itself, the company could readily shift some Nissan production to lower-cost Korea.
Some question why Renault wants to take on another big overhaul job before Nissan is out of the garage. For a mid-size player like Renault with global ambitions, however, buying troubled companies is one of the few ways to build scale, given the fierce competition for top assets by far richer companies. And the Samsung deal would not come along again.
In addition to the 36.8% stake it acquired in Nissan last year, Renault bought 51% of Romanian car maker Dacia for $48 million. And in a bid to raise its profile, last month it picked up the Benetton Formula One racing team for $120 million.
For Renault, this also helps give it a little more of a footprint in its weakest area and the world’s most populous region. Renault has had little presence in Asia. And Nissan is weak as well, with only a minor presence in Taiwan and Indonesia, among other countries, and nothing in China.
Renault has been a symbol of the new, more business-friendly France. Europe’s No. 5 car maker and France’s largest has turned around dramatically in recent years through job cuts and cost-cutting after a long history of losses. And the government stake has been reduced to 44%.
All the turnaround work could lead to some major indigestion, however. In February, Renault announced a 60% drop in 1999 profit, more than expected, due to restructuring-related losses at Nissan.
John-Thor Dahlburg in the Paris bureau contributed to this report.
