Cash-Strapped Hyundai May Need to Make Some Spin Moves

TOKYO -- Three years ago, when Korea was in the grips of the Asian financial crisis, the International Monetary Fund loomed so large for the country that one local sausage maker churned out wieners marketed under the name "IMF Dogs."

Since that time, the Korean economy -- the world's 11th-largest -- has roared back. It's recovered faster than its emerging market counterparts Indonesia and Thailand, which also were ravaged by the currency sturm und drang, and is expected to post an impressive 8% expansion this year.

While the IMF weenies may be off the shelves, Korea, however, hasn't weaned itself of junk food. The country's giant corporate conglomerates, known as chaebol, remain bloated and debt-ridden. Woes at Daewoo had been the focus, but now attention is turning to the Hyundai Group, one of Korea's four largest conglomerates.

Over the next few days, analysts expect the group to announce a vast restructuring program. Although few international mutual funds own Hyundai shares, investors with even a smattering of Korea exposure should take note: The Hyundai chaebol accounts for almost 15% of the nation's GDP. Anything that's good for it is good for a stock market that has slid more than 21% over the past six months.

"Although the market doesn't believe the entire Hyundai chaebol will go under, it still needs to present a credible plan to convince investors that it is serious about reform," says Terence Lim, head of Korean research at Merrill Lynch.

So far it hasn't.

The feud among the ruling Chung family is the stuff of soap opera fantasies. Those battles have resulted in corporate disagreements with the government, which in turn have delayed restructurings for months.

Among the unsavory blunders was a June announcement that Hyundai would spin off Hyundai Motor and other auto-parts-making subsidiaries. The entire family agreed to step out of management. At the last minute, however, the Hyundai Motor chairman, who is also the eldest son of the Chung clan, had a change of heart and refused to relinquish control of the company. The high-profile standoff rattled already nervous investors.

Arguing, however, is no longer an option. While the company has guided its debt-to-equity ratio down from more than 400% three years ago, the figure still stands at 296%, according to statistics released Tuesday. But with the bond market all but shut off to it, Hyundai has only the equity market left as an option in terms of raising capital.

Because the chaebol desperately needs cash but has few traditional options available to it, Merrill's Lim thinks the company might consider spinning off some of its 36 related companies. Hyundai Motor, which has risen nearly 8% over the past three months, is a likely choice, particularly given that DaimlerChrysler (DCX Quote) agreed to buy a 10% stake in the firm. Daimler also has the right to buy another 5% to 15% of the company in three years.

Another potential spinoff is Hyundai Electronics Industries, up 8.6% over the past three months. The chipmaker is No. 2 in its market, behind Samsung Electronics. The two companies together account for 40% of the world's output of dynamic random access memory (DRAM) chips. The company sees first-half sales of 3.1 trillion won ($2.8 billion), a whopping 91% jump from the same time last year.

In addition, the firm owns a relatively unknown unit called ChipPAC. Although ChipPAC, which is looking to conduct an initial public offering this fall, is in the decidedly unsexy business of testing and packaging semiconductors (with little competition), it dominates the industry. Among its biggest customers is Intel (INTC Quote), which accounted for almost 50% of the firm's 1999 revenue of $477 million.

Fans of Hyundai Electronics include the (JAGTX Quote)Janus Global Technology Fund and the (FSEAX Quote)Fidelity South East Asia Fund, which are recent buyers of the stock, according to bigdough.com.

With Janus' fund up a paltry 0.8% in the year to date and the Fidelity fund down 10.4%, however, investing in Asian emerging markets is as dicey as eating bargain hot dogs. You might end up with an upset stomach.