[Funding] Dreamline Increases Capital Again After 2 Years... Rising Debt Burden

Average Annual Facility Investment of 30 Billion Won Over the Past 3 Years... 47.3 Billion Won Investment Planned for This Year
Dreamline's Performance Declines Amid Mobile Carrier Cost-Cutting Efforts
Expecting Profitability Improvement by Reducing Interest Expenses

[Asia Economy Reporter Hyungsoo Park] Dreamline, which has recorded operating losses over the past two years, is launching a rights offering to repay its debts. This decision appears aimed at reducing borrowings to improve profitability and strengthen the financial structure amid steadily rising interest rates.

According to the Financial Supervisory Service's electronic disclosure system on the 22nd, Dreamline will issue 6,076,997 convertible preferred shares (CPS) to existing shareholders. For every one existing share, 0.3666 convertible preferred shares will be allocated. The issue price per share is the face value of 5,000 KRW, raising 30.4 billion KRW through the capital increase. The convertible preferred shares carry voting rights and can be converted into common shares within 10 years. Shareholders can receive a 4.0% dividend on the face value within the scope of distributable profits.

The public offering funds will be used to repay debts with 23.3 billion KRW and for facility investments with 7.1 billion KRW. Borrowings and accounts payable maturing from August this year through the end of next year will be repaid. Repaying borrowings will reduce financial costs and improve profitability. The facility investment funds will be used to open new shared base stations.

Established in 1997, Dreamline operates dedicated line services, internet phone business, and shared base station business. It leases telecommunications network equipment and lines to mobile carriers and system integrators. The Korea Electric Power Corporation (KEPCO) power automation line provision business started in 2015. This service provides optical cables for KEPCO's smart grid distribution automation project. It also installs facilities or equipment such as base station (relay network) buildings, land, towers, and dedicated lines for use by each mobile carrier. As of the first quarter of this year, the sales composition by segment was 47% from the dedicated line business, 7% from shared base stations, and 5% from internet phone services. Other revenues, including distribution and real estate leasing, accounted for 41%.

Dreamline recorded operating losses over the past two years. It posted an operating profit margin of 12.5% in 2019, but profitability deteriorated as operating revenue declined in 2020. Consolidated sales were 163.7 billion KRW in 2020, down 14.5% from the previous year, and 171.3 billion KRW in 2021, up 4.6% year-on-year. Operating losses during the same period were 11.4 billion KRW and 100 million KRW, respectively. Sales related to interconnection facility usage contracts with mobile carriers decreased after the contracts ended in 2020. Sales in the core dedicated line business segment were 94.6 billion KRW in 2019, 85.7 billion KRW in 2020, and 78.8 billion KRW in 2021.

Following cost-cutting policies by the three major mobile carriers?KT, SK Telecom, and LG Uplus?who are gradually building their own communication networks, Dreamline’s telecommunications equipment leasing revenue is on a declining trend.

Due to continued poor performance, the consolidated debt ratio rose to 168.6% in 2020 and 196.7% in 2021. As of the first quarter of this year, total assets stood at 321 billion KRW, current assets at 32.3 billion KRW, total liabilities at 218.2 billion KRW, and total equity at 102.8 billion KRW. Tangible assets accounted for 226.5 billion KRW, representing 70.6% of total assets. The high proportion of tangible assets reflects the nature of the business, which leases dedicated lines, internet lines, and base stations.

Dreamline has maintained an average annual investment of over 30 billion KRW over the past three years. This year, it has planned investments of approximately 47.3 billion KRW, equivalent to 27.6% of last year’s sales. With the introduction of 5G, customer demand for high-quality communication services has intensified, increasing the scale of investments. Until now, Dreamline has financed necessary investments through short- and long-term borrowings. As of the end of the quarter, borrowings amounted to 95.5 billion KRW. Net borrowings excluding cash and cash equivalents stood at 82.3 billion KRW. Considering interest rates ranging from 2% to 6%, interest expenses are around 3 billion KRW. Interest burdens are expected to increase further due to rising base interest rates.

Dreamline’s largest shareholder is Larumieda, which is 100% owned by IMM Infrastructure Private Equity Fund No. 8. Larumieda holds 93.23% of Dreamline’s shares. Other shareholders include SK Broadband with 2.29% and Korea Expressway Corporation with 1.1%.

IMM Infrastructure Private Equity Fund No. 8 signed a stock purchase agreement worth 81.3 billion KRW on January 14, 2020, with major shareholders including the previous largest shareholder, EQ Partners No. 2-1, to stabilize corporate finances. The stock purchase agreement was finalized on July 28 of the same year. Dreamline raised 26.3 billion KRW by issuing convertible preferred shares in October 2020. IMM Infrastructure Private Equity Fund No. 8 has invested over 100 billion KRW to acquire Dreamline and improve its financial structure and is now injecting additional capital again.