SEOULGeneral Motors Corp., Daewoo Motor Co. Ltd. and Daewoo’s main creditor, the Korea Development Bank (KDB), sign a non-binding memorandum of understanding Sept. 21 under which GM and certain of its alliance partners will acquire a large chunk of Daewoo assets.

The new company to be formed is expected to have annual revenues of about US$5 billion, GM says, and will enable GM “to achieve its strategic objectives of gaining access the Korean market and a strong portfolio of highly cost competitive vehicle platforms, in support of global strategic initiatives.”

Ward’s Automotive International is told the GM group includes Fiat Auto SpA, Fuji Heavy Industries Ltd. (Subaru), Isuzu Motors Ltd. and Suzuki Motor Corp. Up to now, only Fiat has been mentioned as a bargaining partner. The MOU culminates more than a year of negotiations between GM and the bankrupt Korean automaker.

The new company will be capitalized through a US$400 million cash investment by GM and a US$197 million cash investment by Daewoo creditors, giving the GM alliance 67% majority ownership. The percentage of ownership among GM’s alliance partners has not been determined. However, it has been agreed that GM’s total ownership in the new company will be less than 50%, although it will remain the majority stockholder.

The remaining 33% equity stake will be owned either by the Korean Development Bank, which represents all of Daewoo’s creditor banks and other creditors, or by a combination of the creditor banks. This has yet to be determined. The creditor group will receive three seats on the new company’s board of directors, which will have a total of 10 “business and industry-focused” directors, Ward’s is told.

“The Korean government, Daewoo Motor and GM have now put together a set of guidelines that will enable us to have a company with the needed capabilities, competence, cash and products with which to grow,” Rudolph Schlais Jr., president of GM Asia/Pacific tells Ward’s. “We have a lot of work ahead of us. This is just one stepping-stone in the march.”

The MOU specifies that if a definitive agreement is reached and signed, the GM group will acquire the following assets:

·Daewoo Technical Center at Bupyeong

·Kunsan car production plant (300,000 annual capacity)

·Changwon car production plant (220,000 annual capacity)

·Daewoo Motor Vietnam (20,000 car annual capacity, 2,000 buses)

·Daewoo Motor Egypt (24,000 car annual capacity)

·Korean domestic service and aftermarket network

·22 Overseas sales subsidiaries in North America and Europe

GM has excluded the Bupyeong component and car assembly facilities from the deal. However the new company will be supplied with engines, transmissions, suspension systems, body systems and midsize and full-size Lanos, Leganza and Magnus cars from the Bupyeong plants.

Daewoo assets not acquired by the GM alliance will be broken up into five separate companies. They include Daewoo Motor Co. Ltd. – includes all overseas production and research facilities not acquired by GM; the Kunsan commercial vehicle operations – medium and heavy truck; the Busan commercial vehicle operations – large passenger buses; and the Bupyeong car assembly operation – to be reorganized as a new company, which GM will have an option to acquire.

Analysts say GM has won a stunning victory in these financial arrangements, and that the company stands to acquire sizeable assets without laying out any cash to the creditors.

Creditor banks, which are owed US$7.75 billion by Daewoo, are being given US$1.2 billion in redeemable preferred stock with an “average” annual coupon rate of 3.5% interest. The paper is conditioned and can be redeemed at some future date only if stipulated profit and productivity targets are met by the new company. Neither GM nor its partners have any liability exposure for that undertaking.

Analysts say the terms agreed to thus far stretch out over a 10-year period. The stock is not redeemable if the company does not make money. The coupon will be based on a formula that pays on the order of 2% over the first five years, 3% over the second five years and 7.5% over the following five years, analysts believe.

The new company will have long-term financing provided by Daewoo’s creditor banks, which will pledge US$2 billion in working capital as required. Because of GM’s involvement and its impeccable AA-plus credit rating, the terms will be highly favorable. “GM (in Korea) probably has a better credit rating than the government of Korea, and banks will line up to lend the new company money,” says security analyst Mark Barclay of Samsung Securities.

The new company will assume normal operating liabilities for severance pay, warranties and supplier obligations, up to US$510 million. It also will acquire new car inventories held by overseas sales subsidiaries and in other locations for their guaranteed value of US$980 million.

A significant part of the MOU is the agreement reached on Daewoo’s overseas sales network. GM will acquire 22 sales subsidiaries located in as many different nations, each with its own sales and service dealership networks through company-owned and independent dealers.

The countries or jurisdictions include the Benelux Union, Spain, Austria, Germany, Switzerland, the Netherlands, Peru, Chile, Venezuela, Columbia, Ecuador, Puerto Rico, Australia, Algeria, South Africa, Nigeria, Canada, the U.S., the U.K. France, Germany and Italy, plus a service company in Shanghai.

Mr. Schlais says GM is assembling a due diligence team with more than 100 members with various skills. Some are in Korea now and many are on their way. “They have a fairly monumental task that needs to be well managed,” he says, declining to estimate a timeframe. “We have shareholders who need to be considered, too,” he says, implying that the due diligence will be extensive and possibly protracted.

All the same, Mr. Schlais says he expects a definitive agreement to be reached by year’s end, although he says GM is not committing to any specific timeframe. “The MOU provides us with guidelines to work from, but we have to make sure the interests of all parties are aired and examined,” he says. “We need to put some meat on the bones.”

Hyundai Motor Co. Ltd. officials reacted favorably to news of the MOU. “We look forward to competing with Daewoo in the marketplace,” a spokesman tells Ward’s. “Daewoo is a brand with a long history in Korea and we’re glad a solution has been found. The Korean industry needs the competition. We look forward to competing with them on a friendly industrial basis.”

Ward's has been following the long and often contradictory negotiations between General Motors Corp. and South Korea's Daewoo Motors Corp. Ltd. for more than a year, as GM's efforts to purchase the bankrupt automaker unfolded. For a chronology of events, click here.