SEPTEMBER 1 , 2000 VOL. 26 NO. 34 | SEARCH ASIAWEEK

When in Debt, Spend Heavily
LG is the latest chaebol with outsized dreams
By LAXMI NAKARMI Seoul

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Tired of hearing about the problems of South Korean chaebol Daewoo and Hyundai? Here's a change. The LG Group does not yet rival either bankrupt Daewoo or humbled Hyundai in terms of the size of its debt or the amount of ink it receives. But that could change. When South Korea's Financial Supervisory Commission reported at the end of July the results of a new, more comprehensive examination of borrowing by the nation's biggest corporate groups, LG's indebtedness turned out to be much worse than the company had previously reported.

The consolidated analysis of LG borrowing ordered by the FSC showed that the entire group's debt-to-equity ratio is 273%. This was substantially higher than the 190% previously claimed by LG, and it also exceeds the 200% cap that the chaebol were to have reached by the end of last year. Especially worrisome is the fact that the company's operating income is currently only 1.42 times its net interest costs. That means only a relatively small proportion of cash is left over to pay for operations after the debt is serviced, and it leaves the company especially vulnerable if banks stop lending. By comparison, Hyundai is in worse shape: It has only 91 cents of operating revenue for each dollar it owes in debt service. Samsung's ratio is a healthier $3.15 of revenue for every debt-service dollar.

None of which puts off LG. In the best Alice-in-Wonderland tradition of Korean chaebol, the company has big, big expansion plans for the immediate future. In June the company announced a restructuring program that included the statement that LG "will emerge as a telecom and Internet-related power in Korea." To that end it has been buying pieces of telecommunications companies and trying to boost its share of the nation's cellular phone market. It now controls 48% of Dacom, South Korea's second-largest international telephone service provider and 17.2% of Hanaro, the largest broadband Internet connect company in a nation going Net-crazy. And, debt be damned, the company says it is planning to spend $5.4 billion on telecommunications — about half of that for a third-generation mobile phone license in Korea — in the next four years.

Where will the money to fund all that expansion come from? LG seems unconcerned. One high-ranking company official, who asked not to be identified, told Asiaweek that the company is "sitting on a pile of cash" from the sale of assets to foreign companies and of LG Semicon to Hyundai Electronics last year. In all, the sales brought in nearly $6 billion. A large chunk of that was supposed to go toward reducing the group's debt, which was $39 billion at the end of last year. The company apparently has other ideas.

The LG official who asked not to be named acknowledges that the debt is "slightly high" but sees no problem in bringing overall debt to below a still-high 200% of equity by the end of the year — the end-of-1999 benchmark. The company may feel that too much debt reduction would crimp its style: It expects its telecommunications arm, LG Telecom, to grow to 3.6 million cellular subscribers by the end of the year — and thirsts for more. With a market share of about 14%, LG is the third-biggest mobile phone company in Korea behind SK Telecom and KT Freetel. Critics complain that LG is not just the smallest of the three service providers. They say the quality of its subscriber base is poor because it includes too many young people who don't have much spending power.

LG's strategy has also included a $5.2 billion merger between two of its most prominent units, LG Electronics and LG Information and Communications. LG Electronics chairman John Koo said the consolidation was intended "to seize the massive growth potential of the information and communications industry and become a global player." But shareholders of LG Information apparently didn't see it that way. More than a third of them sold their shares back to the company rather than take stakes in the new entity. Many may have suspected that the merger was more an attempt to boost a flagging LG Electronics by linking it with one of the group's best performers as opposed to an effort to exploit useful synergy between the units. LG Electronics likely shelled out $154 billion for the share buyback. Ban Young Won, senior telecom analyst for Good Morning Securities, says the number of shareholders who opted out couldn't have been good news: "LG needs every single won it can get hold of now to fund its future telecom business."

Eugene Ha, senior electronics analyst for Samsung Securities, says the joining of the two companies has been perceived so badly because, in effect, "the whole [of the merged company] is less than the sum of its parts." Also, analysts may have a hard time evaluating the combined company because LG Electronics is sprawling whereas LG Information was a relatively contained unit. Given that the entire group has a reputation for being uncommunicative, the loss of transparency will be tough to take. Complains Lee Won Ki, chief fund manager for Regent Asset Management in Seoul: "You never know what LG is up to. And when you are uncertain about a company, you sell." The group may have a strategy to get through the next months even if creditors try to squeeze faster repayment of loans, but if it does it isn't saying. Similar close-to-the-vest strategies have not been terribly successful for Daewoo or Hyundai.

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