POSCO-Saudi fund deal imminent

POSCO’s impending deal with Saudi Arabia’s sovereign wealth fund is raising both concerns and expectations for Korea’s largest steelmaker.

According to financial industry sources, POSCO is set to sell 15.89 million shares or about 38 percent of POSCO Engineering and Construction to Saudi’s Public Investment Fund, or PIF.

The two sides are expected to ink the deal within this month, said a source close to the matter.

The sale is expected to give POSCO a boost in its efforts to streamline its affiliates and focus on steel-related business.

Of the 15.89 million shares, 5.08 million will be newly issued, while the remainder will be from POSCO’s stake in its subsidiary.

Following the deal, POSCO companies will hold about 50 percent of their construction affiliate.

The deal is estimated to raise 1.2 trillion won ($1.08 billion) for the steelmaker, and its construction subsidiary.

For the builder, it is expected to raise much-needed funds after posting a net loss in the first quarter of this year.

POSCO E&C saw sales drop by about 20 percent in January-March from a year ago. Over the same period, operating profits plunged by more than 100 billion won, while net loss stood at 11 billion won.

In addition, with the deal making PIF its second largest shareholder, POSCO E&C is expected to gain greater access to construction and civil engineering projects in Saudi Arabia.

Along with the stock sale, POSCO and PIF plan to set up a joint venture in Saudi Arabia, with POSCO E&C also having a stake.

However, industry watchers said the deal is also raising concerns about POSCO E&C’s future.

They said that it may have little benefit other than improving the builder’s short-term finances.

POSCO’s plans to streamline its businesses are also fueling concerns that the steelmaker may reduce support for POSCO E&C once its stake is reduced.

Hit with criticism that its restructuring measures have been ineffective, POSCO has been selling off overseas assets and has launched a committee to oversee the reforms.

If such worries prove true, POSCO E&C is likely to experience difficulties including a drop in new contracts, which will in turn effect the company’s finances in the long run, a market analyst said.

By Suk Gee-hyun (monicasuk@heraldcorp.com)