GM seals $400M deal for Daewoo


GM's Schlais (R) inks the deal with Jung Keun-yong, governor of the car company's main creditor, KDB

By Alex Frew McMillan
CNN Hong Kong

SEOUL, South Korea (CNN) -- General Motors finally put pen to paper Friday to buy much of bankrupt Daewoo Motor for $400 million.

The Detroit car giant signed a memorandum of understanding to set up a joint venture with Daewoo's creditors.

The creditors, led by Korea Development Bank, will pay in $197 million and write off a large amount of debt. GM and its partners, including Fiat, will contribute the $400 million in cash.

The company is buying two Korean car plants. It will also buy Daewoo's factories in Egypt and Vietnam, as well as its sales subsidiaries in 22 countries.

But the deal does not include the controversial Bupyong factory, Daewoo's largest. That will supply GM's joint venture on a contract basis for a number of years.

If the Bupyong plant hits certain targets, GM might consider buying it in the future, GM Asia-Pacific President and CEO Rudy Schlais told CNN.

GM does not yet have a deal with Daewoo's labor unions. That promises to be thorny, with the workers threatening to make life impossible for GM if it didn't buy Bupyong.

Those kind of issues mean the final deal won't be signed until the end of the year.

"Frankly a definitive agreement still needs to be concluded," Schlais told CNN. "We've got the bones of the agreement and now we're putting the muscle and the texture and so forth on it."

Almost a year of talks

But this puts an end to 11 months of negotiations. GM started talks with Korea Development Bank last October.

"Time and the negotiations have been rather long and protracted," Schlais admitted. But the memorandum wraps those talks up and promises to keep Daewoo going as a viable entity, he said.

"That's extremely positive. It [the agreement] looks at Daewoo and its works on an ongoing basis. It certainly helped the economy of Korea to have a resolution at this point. And from a General Motors point of view we've certainly said that we think we've got the opportunity to make this a win-win," Schlais said.

Korean Finance Minister Jin Nyum had told Daewoo's creditors and GM to wrap up their talks by the end of September, to remove uncertainty from the stock market. The talks originally took place in Hong Kong, to avoid intense media scrutiny in South Korea.

South Korea's Kospi index was down 2.4 percent at 468.61 after morning trade Friday despite the deal, tracking overnight losses in the United States.

Daewoo Motor Sales, the listed sales arm of unlisted Daewoo Motor, was down 1.4 percent at 3,460 won. It was tracking back from early gains and a 3.8 percent rise on Thursday.

Taking on a fraction of debt

Daewoo, South Korea's No. 3 carmaker, entered receivership last November under a debt burned now estimated at $17 billion.

The new joint venture will take on a small fraction of the debt, including $320 million of loans to the overseas sales subsidiaries.

The GM group will own two-thirds of the joint venture, with the creditors owning one-third. Given its partners' participation, GM will own less than 50 percent of the company.

It is buying Daewoo's more-modern Korean plants at Changwon and Kunsan. Bupyong, which was built in 1972 and which experts say is inefficient, will keep supplying cars and engines.

GM doesn't anticipate haggling

Schlais said the price has been settled and the deal will not face the kind of after-the-fact haggling that afflicted a similar deal for three Hyundai financial companies.

The Korean government championed that sale to a team led by insurer American International Group, only for a fight to break out over the price. That has now been resolved.

GM's biggest challenge will now be selling the deal to Daewoo's workers. The company was not keen to take on Bupyong, Daewoo's largest and oldest plant. It was the flashpoint for violent demonstrations after layoffs there in February.

Union leaders had promised to make life impossible for GM in South Korea if it didn't take on the factory. But other Daewoo employees have welcomed GM's interest, seeing it as the only way of keeping Daewoo going.

A separate deal to sell out to Ford collapsed last year. GM used to own Daewoo as a joint venture until 1992, when it sold out partly due to labor problems. It returned its 50 percent stake for $170 million.

That experience will help GM keep Daewoo going as an ongoing company and a Korean company, Schlais said.

But like Ford's deal, GM's agreement is nonbinding, meaning it too could still walk away.

A different sale

GM now has to sell the deal to workers and the Korean public.

"Probably the most significant [outstanding] detail is � labor and getting the people to understand that this is a good deal as outlined, and extremely good for the future.

"This is a great step forward. There's still a tremendous amount of work to be done," Schlais said.

Analysts say GM does not have a coherent strategy in Asia, instead picking up cheap assets opportunistically.

Schlais said buying the Daewoo plants fit into GM's 10-year Asia plan, which it launched in 1994.

It will use the plants to make cars to sell mainly in Korea and China, as well as selling car kits for assembly around the world.