[M&A Alssul Sinjab] International Water Market Shaken by 'GS Inima' Sale

"Turning Seawater into Freshwater"... Desalination Company
GS Engineering & Construction Secures Liquidity by Selling Subsidiary
"GS Inima Valuation at Least 1.6 Trillion Won"

"If the 20th century was the era of 'black gold' (oil), the 21st century will be the era of 'blue gold' (water)." The prediction made by futurist Alvin Toffler in 2007 is becoming a reality. Due to climate change and water pollution issues, 'usable water in daily life' has become increasingly precious around the globe. Since 97% of the Earth's surface water is seawater, humanity's attention is naturally turning to the 'seawater desalination' industry.

Seawater desalination is the process of removing salt and organic substances from seawater to convert it into freshwater for drinking and daily use. According to the market research firm Global Water Intelligence, the global seawater desalination market, which was 18.5 trillion KRW in 2018, is expected to expand to 25.8 trillion KRW this year.

Recently, in the global 'water market,' the possibility of a merger and acquisition (M&A) involving the comprehensive water treatment company GS Inima has become visible, causing a stir. In this M&A insight, we will examine the background of GS Construction's sale of GS Inima, considered a 'prime' subsidiary, and take a look at the overall seawater desalination market.

Acquired by GS Construction in 2012... Strength in Reverse Osmosis Technology

GS Inima is a long-established company founded in Spain in 1955. Headquartered in Madrid, it has consecutively secured major contracts in Europe and Latin America. Its core competitiveness comes from 'reverse osmosis desalination' technology. This method involves placing a semipermeable membrane that allows only certain components to pass between seawater and freshwater. By applying high pressure (osmotic pressure) on the seawater side, pure water moves to the freshwater side, thus purifying it. It is considered an environmentally friendly method with low energy consumption.

GS Construction acquired GS Inima from a Spanish construction company in 2012 for 230 million euros (approximately 352 billion KRW at the time) and purchased the remaining shares from financial investors (FI) in 2019, making it a 100% subsidiary. Since then, GS Inima has executed dozens of large overseas contracts, including a 210 billion KRW integrated water and sewage operation project in Spain and a seawater desalination plant construction project worth over 100 billion KRW in Tunisia, establishing itself as one of the world's leading water treatment companies.

According to the Financial Supervisory Service's electronic disclosure system (DART), GS Inima's sales expanded from 231 billion KRW in 2018 to 405 billion KRW in 2022, and 493 billion KRW last year. It accounts for about 40% of GS Construction's new business sales. Operating profit also recorded a solid performance, reaching 106.1 billion KRW last year, a 35% increase compared to 78.6 billion KRW in 2022.

A GS Inima official stated, "Operations of water and sewage concession projects in Brazil and construction of desalination projects in the Middle East (Oman, United Arab Emirates) contributed to these results." Kyungwon Moon, a researcher at Meritz Securities, said, "GS Construction's orders in the third quarter of this year reached 3.6 trillion KRW, an 80% increase compared to the same period last year, showing significant growth. GS Inima's order growth stood out here. Similar or even higher orders are expected in the fourth quarter."

Recently, GS Construction has been concretizing the sale of GS Inima. The investment banking (IB) industry estimates its valuation to reach at least 1.6 trillion KRW. Water treatment companies and construction firms based in Europe have formed a consortium, selected Goldman Sachs as the advisory firm for the sale, and participated in the bidding. Jo Jeonghyun, a researcher at IBK Investment & Securities, said, "The bid amount is known to be about 1 billion USD (approximately 1 trillion KRW), and the method of share sale (full or minority stake) has not yet been concretely decided. The proposal submitted by the consortium is currently a 'non-binding offer.' If a 'binding offer' is submitted later, price adjustments may occur."

"GS Construction Can Secure at Least 1.6 Trillion KRW in Liquidity Through GS Inima Sale"

There are also evaluations expressing regret over GS Construction's decision to put a strong subsidiary up for sale. Bae Seho, a researcher at IM Securities, said, "The sale of GS Inima will negatively impact GS Construction's future profitability," adding, "Last year, GS Inima's sales reached 493 billion KRW, and net profit was 52.2 billion KRW."

However, the liquidity effect seems clear. From GS Construction's perspective, 'reducing borrowings and interest expenses' is a more important goal. Researchers Jang Moonjun and Kang Minchang at KB Securities emphasized, "As of the first half of this year, GS Construction's unstarted project financing (PF) scale is 2.08 trillion KRW (general development projects), which is relatively large. Net borrowings are also about 3.2 trillion KRW, making it a company with many concerns in the construction industry. Market evaluation may vary depending on the amount of cash inflow through the minority or controlling stake sale of GS Inima." They added, "If GS Inima is valued above its fair value (1.6 trillion KRW) and cash is secured, the net borrowing scale will decrease, reducing market concerns."

Management effects such as 'selecting core new businesses' are also expected. Researcher Jo Jeonghyun said, "GS Construction has pursued sales diversification by investing in new business sectors such as water treatment facilities, modular construction, and secondary battery recycling," adding, "Although it is regrettable to sell a high-growth business unit at a time when building a stable portfolio is important, the sale of GS Inima is a positive choice as it improves capital efficiency and allows focused investment in future business units."