[At a Crossroads: Listed Company] Maxlotec Issues 8% Interest CB to Acquire Naver System

[Asia Economy Reporter Jang Hyowon] Maxlotek, a KOSDAQ-listed company, raised funds through high-interest convertible bonds (CB) to acquire Naver System. Concerns have been raised that if synergies do not materialize, the interest burden could further deteriorate the financial structure.

According to the Financial Supervisory Service on the 2nd, Maxlotek announced the day before that it will acquire 3,853,777 shares (51.0%) of Naver System for 15 billion KRW. The counterparty is Lim Byungjo, CEO of Naver System, and the scheduled transfer date is May 29.

Founded in 1998, Naver System operates businesses such as mobile solution development, navigation, and traffic information center system integration (SI). Last year, it recorded sales of 66.1 billion KRW, operating profit of 1.9 billion KRW, and net profit of 1 billion KRW.

Maxlotek plans to raise 15 billion KRW for the acquisition of Naver System through issuing CBs. On the 18th of last month, Maxlotek announced it would issue CBs worth 20 billion KRW to Irvine Investment Advisory. Of this, 15 billion KRW is intended for acquiring other companies. The payment date is set for the 17th of this month.

The notable point is the interest rate of the CB. The coupon rate of this CB is 8%. Maxlotek’s short-term loan interest rates from banks range from 2% to 5%. Including the option to convert into shares later, the CB’s interest rate is higher than that of general borrowings.

Moreover, the refixing (conversion price adjustment) limit is up to the par value of 500 KRW. Even if Maxlotek’s stock price falls 63.6% from the conversion price of 1,375 KRW, investors will not incur losses. Under the Capital Markets Act, the CB refixing limit is restricted to 70%. Par value CBs require amending the company’s articles of incorporation to be issued. At the year-end shareholders’ meeting last year, Maxlotek prepared the basis for issuing par value CBs.

While Irvine Investment Advisory benefits from acquiring CBs under favorable conditions, Maxlotek is expected to face increased financial burdens due to the CB issuance.

As of the end of last year, Maxlotek’s debt ratio was 168.3%. If the 20 billion KRW CB is recorded as debt, the debt ratio will rise to 239%. The current ratio will also shrink from 81.3% to 49.7%. Although these ratios will change if converted into shares later, this would result in issuing shares equivalent to 46.5% of the current total shares, risking dilution of stock value.

Interest expenses are also significant. The annual interest expense from this CB issuance is expected to be about 1.6 billion KRW, an 80% increase over Maxlotek’s total interest expenses last year. Even if Naver System is consolidated as a subsidiary and all operating profits are reflected in the consolidated financial statements, most of the profits are expected to be offset by interest expenses.

Maxlotek’s core business is also sluggish, which is expected to further increase financial burdens. Maxlotek recorded an operating loss of 8.5 billion KRW last year. Maxlotek manufactures industrial gantry robot systems and processes cylinder blocks and heads for passenger car engines. Sales related to its main business, gantry robots, plunged 59.1% last year, turning operating results into a loss.

Regarding this, Maxlotek stated, “Due to last year’s poor performance, business changes became necessary. Although funding costs increased due to unfavorable market conditions, we expect synergies with Naver System and anticipate a turnaround this year.”