Troubled spirit of Korea on the block

As darkness falls across South Korea, in restaurants, bars and roadside tented stalls, raucous groups of red-faced salaried men huddle over grilled meats, steaming noodles, spicy kimchi, and - the essential common denominator - bottles of soju.

With the vodka-like spirit being the vital fuel of a good time, Korean-style, every adult drinks 86 bottles of the stuff annually.

On Wednesday afternoon, in the more sober confines of the Seoul Finance Centre, United States investment bank Merrill Lynch collected bids from companies interested in buying the dominant player in this lucrative sector. Distiller Jinro has a 55.4 per cent share of the US$1.4 billion-a-year soju market.

The Jinro sale is expected to be the largest and most competitive auction in Korea this year. Price estimates range from US$1.5 billion to US$3.6 billion.

Jinro also has a strong brand presence in Japan, where soju accounts for about 10 per cent of the spirits market. The preferred bidder will be chosen early this month, with the final sale taking place in July.

Song Ji-hyun, an analyst at Goodmorning Shinhan Securities, said: 'This is the biggest deal I have ever heard of in the food and beverage sector: The whole alcohol market structure could change after this.

'Any company which succeeds in this has the chance to really enter the market here, as Jinro has bargaining power with the wholesalers.'

At least 10 companies have joined the race, including food maker Doosan, food processors CJ Corp and Daesang, brewer Hite, Lotte Chilsung Beverage, and Taihan Electric Wire, a Jinro creditor. US investment fund Newbridge Capital and JP Morgan Partners have also thrown their hats into the ring, according to Reuters.

Japanese brewer Kirin pulled out of a consortium with CJ Corp this week, while Asahi Brewery has formed a consortium with Lotte.

Local analysts say the three frontrunners are Doosan, CJ Corp and Lotte-Asahi. A Jinro acquisition would create synergies and all have cash to spare.

For the winning bidder, the opportunities are golden.

Asahi in particular stands to gain, as the Korean beer market is divided between only two local players, Hite and Oriental Brewery.

However, other leading international spirits holding companies, such as Diageo and Allied-Domecq, have not shown interest in the bid.

Kim Jung-shik, managing director of Guinness UDV in Seoul, said: 'International companies have different aspirations; they want to focus on their existing portfolios.

'And soju is a Korean traditional drink; it is a very sensitive sector to enter.'

In this emotional market, nationalistic passions have already flared.

With a US investment bank talking up the sale price, and with a Japanese brewer and US investment funds involved, the sale could proceed roughly.

A local joke asks how a company selling soju in Korea could ever go bankrupt, but the story is all too familiar. Jinro is on the block due to financial troubles stemming from massive overinvestment in the run-up to the Asian financial crisis in 1997, which forced it into a five-year workout programme.

In May 2003, one of Jinro's key creditors, Goldman Sachs, lost patience with the pace of restructuring and, citing mismanagement, petitioned for the distiller to be put under court receivership.

Jinro's management and union howled, claiming Goldman was planning to bury a landmark Korean brand. Domestic media complained that a local flagship was going under the hammer at the whim of a profit-obsessed foreign entity.

However, the court gave Goldman the nod - marking the first time a Korean company had been pushed into court receivership by an overseas creditor, and earning the local court system praise for impartiality.

Jinro owes US$2.8 billion to its mostly foreign creditors, including Deutsche Bank and JP Morgan.

Goldman Sachs raised further controversy at the beginning of last month when it said Jinro was worth US$3.6 billion. Bidders angrily accused the bank of trying to talk up the deal.

Some analysts agree. 'Even if I add in their market share, their 25 per cent margins and their management premium, I can't say Jinro is worth more than US$2.5 billion,' Mr Song said.

However, other market watchers expect the eventual buyer to pay a premium.

'The fact that international drinks groups are not involved tells you that the asking price is considered high,' said Hank Morris of Industrial Research and Consulting.

'And for this particular sale, I think equity bids by non-food and beverage companies are a long shot. Local companies are not price sensitive, they typically focus on market share, so I guess they are prepared to bid on the high side.'