Indemnity clause to take burden off Doosan Infracore buyer

Doosan Group plans to include an indemnity agreement to remove a major obstacle of the Doosan Infracore Co Ltd sale — an ongoing legal battle between Doosan Infracore and Doosan Infracore China Co Ltd (DICC)’s financial investors.

Doosan Group has distributed a teaser and information memorandum to prospective buyers for Doosan Infracore, sources said on August 10. In a move to offload Doosan Infracore, the group plans to spin off the construction equipment maker into a holding company and an operating company.

The operating company will be up for sale after the spin off. It consists of all of Doosan Infracore’s business units except for Doosan Bobcat Inc. The holding company, which will own Doosan Bobcat, will merge with Doosan Heavy Industries & Construction Co Ltd, the largest shareholder of Doosan Infracore.

The legal battle between Doosan Infracore and financial investors of DICC, including IMM Private Equity (PE), Hana Financial Investment and Mirae Asset Global Investments PE, is considered the major barrier to the Doosan Infracore sale.

In 2011, the local PE firms acquired a 20% stake in DICC under the condition that it should return their principal investment in DICC through an initial public offering (IPO) within three years or sell their stakes to a third party. The IPO was canceled and the PE firms filed a lawsuit against DICC’s largest shareholder Doosan Infracore, accusing parent company Doosan Infracore of being hesitant to cooperate on stake sale.

The lawsuit is expected to cost Doosan Infracore approximately 750 billion won ($632 million) in compensation if defeated in the final ruling.

A source familiar with the deal said the group is expected to include an indemnity agreement in the deal between Doosan Heavy Industries & Construction and the buyer of Doosan Infracore.

“Through the indemnity agreement, Doosan Heavy Industries & Construction will take full responsibility related to the lawsuit with DICC and the buyer of Doosan Infracore will have no responsibility whatsoever,” said an industry source. “This part is apparently being emphasized in the Doosan Infracore sale.”

Market insiders are raising questions about whether the cash-strapped Doosan Heavy Industries & Construction will be able to handle 750 billion won of contingent liabilities related to the lawsuit.

Doosan Heavy Industries & Construction is likely to draw up countermeasures after the final ruling has been announced. Some market insiders expect the Supreme Court to make its ruling in the second half of this year.

“Doosan Heavy Industries & Construction wants to keep Doosan Bobcat and Doosan Bobcat has been excluded from the Doosan Infracore sale,” said an industry source. “But it may have to offload Doosan Bobcat if it loses the DICC lawsuit.” (Reporting by Byung-yoon Kim)