Hyundai Heavy Industries Holdings is trying to sell a 40% stake in wholly-owned subsidiary Hyundai Global Service to shore up its finances before incorporating Daewoo Shipbuilding & Marine Engineering, sources said on Friday (October 16).

The holding company is looking for investors without using a deal manager and multiple private equity (PE) firms are reportedly studying the deal.

Established in 2016 after it was split off from Hyundai Heavy Industries, Hyundai Global Service provides maintenance services for vessels manufactured by Hyundai Heavy Industries Group and other shipbuilders. The subsidiary recorded revenue of 809 billion won ($712 million) last year, almost a twofold increase from 2018. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose sharply to 112.3 billion won last year, from 56.7 billion won in 2017 and 73.6 billion won in 2018.

Hyundai Heavy Industries Holdings has been planning the sale for months to improve its financial status. Hyundai Heavy Industries Group’s debt ratio was 131.5% on a consolidated basis at the end of June, up from 116.4% last year.

Market insiders said the holding company does not have any urgent need to shore up its finances, but it seems to have reviewed various options in case of a worsening financial status.

NICE Credit Rating said the group’s EBITDA has improved dramatically from a year ago thanks to improvements with its marine division, but limited money is entering and leaving the company due to new investments by the energy division. Hyundai Heavy Industries Group’s net borrowing increased to 9.7 trillion won at the end of June 2020, after falling to 6.1 trillion won at the end of 2018, despite a cash inflow from the sale of a minority stake in Hyundai Oilbank for 1.4 trillion won last year.

The rating agency said it expects the marine division to have a heavier working capital burden after the group incorporates Daewoo Shipbuilding & Marine Engineering.

Hyundai Heavy Industries Holdings reportedly wants to sell its stake in Hyundai Global Service for about 2 trillion won, or a multiple of approximately 17 times. The deal is likely to be worth between 800 billion won and 900 billion won based on the company’s equity value of 2.28 trillion won at the end of 2019.

Major domestic and foreign private equity firms that own blind-pool funds appear to be capable of making such investments. However, some market insiders said the deal is less attractive to large-sized PE firms, as they tend to prefer buyout deals. (Reporting by Hee-yeon Han)