News Room - Business/Economics

Posco, the nation’s leading steelmaker, said Monday it has inked a deal to sell a stake in its construction arm to Saudi Arabia’s sovereign wealth fund.

The company said it sold a 38 percent stake in Posco Engineering and Construction (E&C) to Saudi Arabia’s Public Investment Fund (PIF) for 1.24 trillion won ($1.08 billion). The deal was finalized at the headquarters of Posco E&C in Songdo, Incheon, by Posco Chairman Kwon Oh-joon and PIF Secretary General Abdulrahman Almofadhi.

It includes a 25 percent stake already owned by the steelmaker in the construction arm and a 13 percent stake coming from an issuance of new shares by Posco E&C.

The two sides also planned to establish a joint venture for a series of infrastructure projects including a railway, hotel and other construction projects undertaken by the Saudi Arabian government, which has been trying to foster local manufacturing industries including a car business to response to recent changes in the world energy market.

The deal took longer than expected. After receiving an offer for the Posco E&C stake in August from PIF, the deal got stuck after the construction company was investigated by the Korean prosecution for parking funds outside of Korea. The nine-month negotiation was supported by President Park Geun-hye, who talked up the deal when she visited Saudi Arabia in March.

With the deal, Posco is expected to speed up a restructuring plan driven by Chairman Kwon, who is trying to improve the company’s solvency. Selling the stake will give about 800 billion won to Posco and about 400 billion won to the construction arm, which had an 11 billion won net loss in the first quarter due to a poor performance on the global market. Posco E&C will own shares in the joint venture and two people appointed by PIF will join the company’s board of directors.

Established in 2008, PIF’s estimated total assets are about $300 billion and it has been investing in manufacturing industries under the guidance of Saudi Arabia’s finance department. It now operates under the Committee for Economic Development (CED), which reports directly to King Salman bin Abdulaziz. Consisting of 22 ministers, the CED directs Saudi’s overall economic development plans.

“It’s a win-win partnership between Posco and Saudi Arabia,” a spokesman for Posco said. “Through the deal, the company will have better profitability as it will be able to participate in a series of construction projects that will be launched by the Saudi Arabian government while the PIF will get Posco’s advanced construction technologies.”

But there are remaining concerns for Posco and its construction arm. Industry insiders worry that selling the stake will weaken Posco’s influence on its construction arm and might hurt Posco E&C’s solvency. Earlier this year, Posco chief Kwon said the company will focus more on its steel business and its affiliates should not rely on the mother company to improve their competitiveness. In the past, Posco E&C won many orders from the steelmaker.

In 2013, the construction arm won projects worth 2.29 trillion won from Posco, but the figure decreased to 826.1 billion won last year as the mother company hesitated in investing in new businesses.

Meantime, revenue for Posco E&C in the first quarter was 1.71 trillion won, down by 20 percent from a year earlier.

“This is work that [Chairman] Kwon needs to finish,” said Choi Moon-sun, an analyst at Korea Investment & Securities. “It looks like he will improve the financial solvency of Posco, but the weakened influence on its affiliate is something he also needs to deal with.”