Korean Air overbidding for S-Oil stake

By Ko Kyoung-tae

Korean Air Lines Co.`s takeover bid for treasury shares of S-Oil Corp. may weigh on bottom lines of the air carrier and have limited positive effects, analysts warned.

They are particularly concerned that the stock purchase would not help cut fuel costs as much as expected.

"Savings in fuel cost will not be large," Ko Min-je, an analyst at Hanwha Securities Co., told The Korea Herald.

"There might be some discounts, but S-Oil cannot supply oil to Korean Air at a discount because it is against the fair trade law."

Korean Air and its affiliate Hanjin Shipping Co. have jointly sought a stake in the nation`s third largest refinery amid rising oil prices.

Korean Air spent about 2.4 trillion won ($2.55 billion) on fuel last year due to a recent jump in oil prices, accounting for nearly 40 percent of its total operating costs.

Hanjin Shipping also spent nearly 1 trillion won to fuel its vessels last year.

S-Oil currently supplies about 10 percent of the jet fuel purchased by Korean Air and over 7 percent of the vessel fuel for Hanjin Shipping.

The skyrocketing oil prices have damaged the two transporters, which experts think prompted them to bid for shares in the fuel supplier.

Some observers have expected the purchase to enable Korean Air and Hanjin Shipping to buy fuel at a discount.

But skeptics point out the government stringently bans such unfair trade between group affiliates.

"There is an ample supply of jet fuel and Bunker C oil in the market," said Yang Ji-hwan, an analyst at Daishin Securities Co. "The oil prices are also declining."

Insufficient cash held by Korean Air also casts a cloud over the deal.

Industry watchers said that the Seoul-based company can only finance the deal on debt, which would incur heavy interest costs.

The 28.4 percent stake of the refinery is estimated to be about 2 trillion won at current stock prices.

The acquisition price, however, is largely expected to go up further because the stake will allow Korean Air to participate in the management of S-Oil.

"The bigger the premium, the heavier the interest burden it poses on Korean Air," Ko said.

Analysts further caution the expected stock dividend income may not be enough to offset the massive interest costs.

But optimists stressed the acquisition will help Korea`s largest Hanjin Shipping to tap the fast-growing crude oil transport market.

S-Oil imports about 200 million barrels from Saudi Aramco, Saudi Arabia`s sole state-run oil producer and the largest shareholder of S-Oil, every year.

The shipments will soar in the coming years as the refinery is set to expand facilities here.

S-Oil plans to build a 480,000 barrel-per-day crude distillation unit by 2010 in Seosan, South Chungcheong Province, raising its total capacity by almost 70 percent.

The company`s oil transports are currently run by foreign carriers.

But some critics downplayed the rosy outlook, saying Hanjin Shipping has no major fleet that can ship oil and gas.

"Hanjin does not have big tankers to transport oil," Yang said.

"85 percent of the company`s vessels are cargo ships. The synergies that everybody expects from the acquisition are somewhat overblown."

The stock price of Korean Air is sliding fast, reflecting investor`s concerns over the acquisition.

The airline has lost nearly 10 percent in share value following news that the company will buy an S-Oil stake this month.

The sudden fall even overrode the better-than-expected 2006 earnings announced last week.

"Hanjin Group Chairman Cho Yang-ho seemingly has an excessive ambition," said a local asset manager, who declined to be identified.

Despite the growing anxieties over the oil stock acquisition, some experts say the cross-industrial deal may help stabilize the income stream for the group.

Oil refineries usually reap in bigger profits during an oil price hike, which hit air carriers and shippers hard due to heavier fuel costs.

This contrasting earning cycle is attractive to the bidders who suffer from the ups and downs of the market. "I think they are trying to balance their revenue structures through the acquisition," Daishin`s Yang said.

(kkt@heraldm.com)