This article was published on April 23, 2025, at 5:25 p.m. on the ChosunBiz MoneyMove site.
SMEC, a KOSDAQ-listed company, is preparing a response plan to external borrowing in case of failure in its rights offering aimed at acquiring the machine tool division of HYUNDAI WIA. This will be conducted separately from the 110 billion won acquisition financing being pushed forward with the financial investor (FI) Rhilson Private Equity (PE).
According to the investment banking (IB) industry on the 23rd, SMEC has discussed borrowing terms with a first-tier bank, considering the possibility of failing to raise funds through a rights offering. This is to prepare for the scenario where the funds raised through the rights offering fall short of the target or if the Financial Supervisory Service requests revisions that lead to withdrawal.
An industry official noted, "It appears that SMEC is preparing for the situation where it may not be able to cover shortages with its cash holdings if it fails in the rights offering or if the amount raised decreases due to price adjustment." They added, "Currently, negotiations have been completed with a domestic bank, and the likelihood of failing to secure external borrowing is low."
SMEC is pushing forward with a rights offering worth 53.9 billion won to acquire the machine tool sector of HYUNDAI WIA. The structure involves issuing a total of 28 million new shares through a public offering of unallocated shares after allocation to shareholders. However, the Financial Supervisory Service has requested SMEC to submit a correction report, putting a brake on the rights offering. This is because the acquisition funding of 118.3 billion won that SMEC is responsible for is similar to SMEC's market capitalization of 114.5 billion won based on the closing price on that day.
Some in the industry have forecasted that it will be difficult for SMEC to acquire the machine tool division of HYUNDAI WIA if it fails in this rights offering. However, analysis suggests that the deal closing should not encounter major issues as SMEC has already completed discussions for corporate loans worth several hundred million won. SMEC believes that if the total amount raised falls below 34.5 billion won, external borrowing will become necessary considering the company's current cash reserves.
Earlier, SMEC and the Rhilson PE consortium signed a stock purchase agreement (SPA) to acquire HYUNDAI WIA and its machine tool division for 340 billion won. Rhilson PE and SMEC will bear 221.7 billion won and 118.3 billion won, respectively, securing 65.2% and 34.8% of the shares. Of this, SMEC agreed to bear 83.3 billion won in rights offering funds, 20 billion won as a deposit, 9.4 billion won in cash, and 35 billion won in acquisition financing.
SMEC and Rhilson PE have selected NH Investment & Securities as the lead arranger for the acquisition financing and have currently received a loan commitment of up to 110 billion won. It is also confirmed that a project fund being formed by Rhilson PE has completed a subscription agreement worth 140 billion won. A domestic institutional investor is reported to be conducting an investment review committee for an additional contribution of 50 billion won. Even if SMEC fails in the rights offering, there is a possibility that Rhilson PE could inject additional funds.
The payment for the acquisition of the machine tool division of HYUNDAI WIA is scheduled to take place at the end of June. After the acquisition, Rhilson PE will become the largest shareholder, designating 3 out of 5 board members, while SMEC will appoint 2. SMEC will have the preemptive right to purchase the shares held by Rhilson PE starting two years after the transaction's completion and will have the right to participate in any transfer to a third party. SMEC explained, "In the future, we plan to use the non-controlling interest net income and acquisition financing to buy shares from Rhilson PE."
Meanwhile, SMEC has submitted a correction report despite the halt from the FSS and has attempted a renewed rights offering.
SMEC acknowledged in the correction report that "the higher the rights offering ratio, the greater the potential dilution of existing shareholders' per-share value." According to SMEC, an analysis of the rights offerings of 50 billion won or more but less than 70 billion won allocated to shareholders and publicly offered (after 2021) found a total of 15 cases, with an average rights offering ratio of 43.1%.
However, SMEC stated, "In our case, the rights offering ratio is around 69.58%, which is considered a relatively high level of shareholder value dilution," and added, "This rights offering could lead to excessive shareholder value dilution compared to existing cases."
Nonetheless, SMEC stated, "We plan to utilize acquisition financing, own cash reserves, and borrowing funds for the acquisition of the machine tool division of HYUNDAI WIA, and we believe that keeping the rights offering ratio below 70% is an appropriate size that can secure successful acquisition funding and minimize shareholder value dilution."