POSCO, the nation’s top steelmaker, confirmed Friday that it had submitted a letter of intent to take over Tong Yang Power, the electricity-generating arm of faltering Tong Yang Group.

“POSCO Energy, an energy business arm of the group, decided to join the bid with an interest in the thermal power plant project of Tong Yang Power,” an official from the steel group said.

Last year, Tong Yang Power won a business license from the government to build two coal-fueled thermal power plants, each with a capacity of 1 megawatt, in Samcheok, Gangwon Province by 2019.

Besides POSCO, six other companies, including Hanwha, SK and Doosan, joined the bid as part of efforts to secure a new and stable income source.

The deal for Tong Yang Power is expected to be worth around 400 billion won ($386 million).

Although it is a relatively small deal for a conglomerate the size of POSCO, the reason competition for Tong Yang Power is heating up is because the government has signaled that it is against issuing more licenses for coal-fueled power plants due to environmental issues.

“Considering the continued downturn in its core steel business, the top management of POSCO, whose main concern is to improve the group’s financial health, seems to be attracted to the thermal power business offering a stable income source,” industry watchers said.

POSCO’s operating profit has continued to fall for the past few years due to a slump in its core business of steelmaking and capital investment expansion for merger and acquisition deals beyond the steel sector.

With the decision to join the bid for Tong Yang Power, industry sources said the steelmaker was likely to delay its decision on whether to join another deal to acquire Dongbu Steel’s Incheon plant and Dongbu Power’s Dangjin Corp.

The company is carrying out due diligence on the two affiliates of Dongbu Group in response to a proposal by the state-run Korea Development Bank, the main creditor of Dongbu Group, to take over the two ailing units of Dongbu as a package.

The value of the deal, which is estimated to reach around 1.6 trillion won ($1.5 billion) however, seems too expensive for POSCO.

The steelmaker is still going through financial restructuring that began after the inauguration of new chairman Kwon Oh-joon last month.

By Seo Jee-yeon (jyseo@heraldcorp.com)