Daewoo Grows Woozy Under Strict Restructuring Plan

Creditors are demanding the South Korean conglomerate shed all but six of its 30 units to prevent the company from collapsing under its own weight.
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TOKYO -- Kim Woo-choong, the founder and chairman of the

Daewoo

industrial conglomerate, must have choked as he sipped the ceremonial cup of potato-based liquor South Koreans tip to seal business deals. After all, the country's president,

Kim Dae-jung

, had told him to dismantle his sprawling, and effectively bankrupt, business empire by the end of the year.

The 30-year-old

chaebol

, as South Korea's big conglomerates are known, is in need of restructuring. By dabbling in everything from cars to computers to stock brokering, it has rung up a staggering debt of $47.2 billion -- a figure greater than the Hungarian economy.

Creditors, particularly the loud U.S. and European banks that have loans to Daewoo, demanded it shed all but six of its 30 units to prevent the company from collapsing under its own weight. Failure may not only mean the end of Daewoo, which means "big universe," but could also undermine confidence in a country that is finally recovering from the 1997 currency crisis that humbled the region.

That risk, analysts say, is growing. Daewoo has just four and a half months to get rid of assets it values at $15 billion.

Walid Alomar & Associates

, a U.S. investment firm, has agreed to buy

Daewoo Electronics

. And

Daewoo Motors

and America's

General Motors

(GM) - Get Report

have agreed to discuss some form of alliance.

Less appealing assets, like machinery maker

Daewoo Heavy Industries

and contractor

Keang Nam Enterprises

, might be more difficult to sell. After all, who wants to own a housing builder when the average Korean is worried about the stability of his job?

"Daewoo is not going to be able to meet the deadline," says Paulo Rhee, a financial analyst at

HSBC Securities

, which has an investment banking relationship with several Daewoo units, including

Daewoo Securities

. HSBC has a buy rating on the brokerage, which is considered by many to be the diamond in the conglomerate's tarnished tiara.

Already the company's troubles have weighed on the Korean stock market. On Tuesday, the day after the restructuring was announced, the benchmark

KOSPI

index dropped nearly 4% as investment trusts trampled over each other to sell Daewoo shares and bonds they worried could soon be worthless.

According to estimates, 6 trillion won ($5 billion) in Daewoo-affiliated securities were sold on Tuesday and Wednesday. While the selling abated after the government reassured investors with guarantees, a repeat could well happen if buyers for the conglomerates' industrial detritus aren't found.

"Daewoo and the government have had a short-term victory," said a trader at a U.S. investment bank in Seoul, who asked not to be named. "But the mess

is still all tangled up."

Still, the government's handling of the Daewoo debacle is winning praise. Rather than shield the conglomerate, the tactic preferred by previous administrations, Kim Dae-jung has taken the lead in forcing change. Cozy ties -- the government funnels money to the chaebol in the form of pet industrial projects and the chaebol reciprocates with political donations -- are being severed.

The intense courtship between government and business is no longer needed, the president told the people last Sunday. The country will have to endure higher unemployment (it's declined from recent highs but remains above 6%) and slimmer wallets.

"I am a big fan of the government right now," says HSBC's Rhee. "They are showing strong leadership in restructuring."

That's true. But it's unlikely many Koreans are toasting it right now.