[M&A Insights] Ssangyong C&E, Will It Be Put Up for Sale... Impact on the 'Cement Industry'

Domestic Cement Industry Oligopoly of 5 Companies
Han&Co Initiates Delisting Procedure for No.1 Ssangyong C&E

The movie 'Concrete Utopia' depicts the survival story of residents in corridor-style old apartments and luxury newly built apartments. The main conflict in the film arises from where people live. After a massive earthquake, residents of the old apartments reject and expel the survivors from the luxury apartments who had previously ignored and looked down on them.

Interestingly, we all live in 'concrete' structures. Concrete is essential for building key infrastructure such as highways, tunnels, and bridges. In particular, 'cement,' a powder made by crushing limestone, is a core ingredient in making concrete. When mixed with sand, gravel, and other materials, it becomes a concrete mixture, and construction costs fluctuate significantly depending on cement prices.

Recently, domestic private equity firm Hanwha & Company (Hanwha Co.) has been proceeding with the delisting process of Ssangyong C&E, the top cement company in Korea, which it acquired in 2016. Ssangyong C&E holds a 25% market share in the domestic cement market, ranking first. Hanwha Co. has launched a public tender offer for the remaining shares to delist the company. We explored the reasons behind Hanwha Co.'s decision and the potential impact on the domestic cement industry ecosystem.

Growth Alongside Korea's Industrialization... 'No. 1 Cement Company' Ssangyong C&E

Korea's cement industry began to grow significantly during the rapid growth period of the 1960s. The late Kim Seong-gon, former chairman of Ssangyong Group, founded Ssangyong Yanghoe Industrial, the predecessor of Ssangyong C&E, in 1962. The company led the domestic market by producing about 10 million tons of cement annually in line with the government's industrialization policies. Since then, Korea has become the 12th largest cement-producing country in the world, with an annual production capacity of about 60 million tons.

Hanwha Co. took over management in 2016, acquiring a 46.14% stake for 883.7 billion KRW. Hanwha Co. sold non-core businesses such as Ssangyong Materials and merged the owned companies including Daehan Cement, Hannam Cement, and Daehan Slag. In 2021, aiming to become a 'comprehensive environmental business,' the company renamed itself Ssangyong C&E, incorporating the initials of Cement and Environment.

Currently, the domestic cement industry has been restructured into an oligopoly of five companies?▲Ssangyong C&E ▲Hanil Cement ▲Asia Cement ▲Sampyo Cement ▲Sungshin Cement?after fierce price competition and restructuring from 2015 to 2018. Since no cheaper and more efficient building materials than cement have been secured, this oligopoly structure has increased the pricing power of cement companies. After the Russia-Ukraine war began in 2022, the price of bituminous coal, a key raw material accounting for 30-40% of cement production costs, surged, prompting the cement industry to raise prices four times. The cumulative increase during this period reached 40%.

According to a disclosure on the 7th, Ssangyong C&E's sales last year are tentatively estimated at 1.8694 trillion KRW, with operating profit at 184.1 billion KRW. Sales increased by 9.6% year-on-year, largely due to the effect of cement price hikes. Operating profit decreased by 4.1% due to rising raw material costs.

Industry Restructuring Possible Due to Sale... "Positive Impact Regardless of Sale Outcome"

Meanwhile, Hanwha Co. has been conducting a public tender offer since the 5th on the KOSPI market to purchase 102,547,560 shares of Ssangyong C&E (20.1% of total issued shares) as part of the delisting process. The purchase price is 7,000 KRW per share, with a total purchase amount of 701.7829 billion KRW. So far, Hanwha Co. has invested a total of 1.4375 trillion KRW to secure about 79% of the shares. Adding the funds for this tender offer will increase the total amount.

It is widely expected that the post-delisting process will involve mergers and acquisitions (M&A). The investment banking (IB) industry views this decision as a way to eliminate risks from stock price fluctuations and to secure efficiency in the future exit (investment recovery) process. Researcher Park Sera from Shin Young Securities said, "Ssangyong C&E currently operates its core cement business alongside an environmental business centered on intermediate recycling resource processing. It is expected to focus on restructuring while actively expanding its environmental business." Researcher Kim Sun-mi from Shinhan Investment Corp. also analyzed, "Hanwha Co.'s investment recovery has been delayed due to long-term holding of about eight years. Minimizing exposure to external environments and stock price fluctuations of Ssangyong C&E appears aimed at efficiently increasing corporate value."

The key issue is the valuation, estimated at 3 to 4 trillion KRW. Ssangyong C&E's market capitalization, based on the closing price on the tender offer start date (6,940 KRW), is 3.461 trillion KRW. This size is considered too large for other cement companies to acquire. Researcher Park said, "The sale price for the largest shareholder's stake, including management rights, will be a big deal worth around 3 trillion KRW." He added, "Since the cement industry restructuring has already been completed, M&A between similar companies may not be approved under the Fair Trade Act if market share becomes excessively high." Construction companies are also busy managing project financing (PF) risks.

Concerns are growing that the overall construction industry will face a downturn this year due to PF risks and sluggish orders. Additionally, challenges such as ▲increased imports of cement ▲expanded use of admixtures ▲emergence of substitutes remain for the industry to solve. There is also ongoing demand for the industry to transform into an eco-friendly sector through carbon reduction.

However, Ssangyong C&E's M&A is expected to have a positive effect on the entire cement industry regardless of how it proceeds. Researcher Park said, "Even if Ssangyong C&E becomes a non-listed company in the future, its impact on the cement industry will be limited." He added, "Rather than downsizing the core cement business, it is expected to consider active synergy with the environmental business. Active moves in the intermediate recycling resource processing industry are anticipated."

Researcher Kim predicted, "If Hanwha Co.'s exit proceeds, 'continued performance improvement due to strengthened pricing power' will become more favorable." She added, "The most likely scenario is a split sale to multiple companies. If the industry is reorganized into four companies through this, pricing power will be further strengthened." She also noted, "Cement companies have created a stable structure after several rounds of losses, so there is no reason to repeat mistakes caused by price competition as in the past." The M&A market is closely watching what kind of 'Concrete Utopia' the cement industry will create in the future.