Hyundai Motor Group, South Korea’s second-largest conglomerate by asset, will buy the remaining 20 percent stake in Hyundai Capital Co. held by General Electric Capital Corp. (GE Capital), a move that will end their 12-year joint venture partnership.

According to multiple sources from the investment bank industry on Monday, Hyundai Motor and GE Capital are expected to sign a sales and purchase agreement (SPA) on October 17 that involves the Korean conglomerate buying all 20 percent stake in its auto finance unit from GE Capital, the financial services unit of United States-based General Electric Co. The stake is estimated to be worth about 600 billion won ($541.2 million).

The latest stake purchase plan by Hyundai Motor Group comes after its two automakers Hyundai Motor Co. and Kia Motors Corp. bought a combined 23.3 percent stake in Hyundai Capital from GE Capital in February for 703.1 billion won. An unnamed official from the investment bank industry said, “GE Capital initially planned to sell its remaining (20 percent) shares (in Hyundai Capital) to a third party but with no luck, it ended up exercising put option, which Hyundai Motor accepted.”

Industry sources note that the latest stake sales and purchase will be arranged through the so-called total return swap (TRS) arrangement that involves a special purpose company. TRS is a swap agreement that is similar to stock collateral loans in that it is in the form of derivative trading where the seller guarantees fixed profit to the buyer when disposing stakes. Hyundai Motor will buy 20 percent shares in Hyundai Capital through a special purpose company, and the shares held by that company will be handed over to other investors based on a TRS deal.

The deal will involve Hyundai Motor providing a fixed interest for a set period of time to those investing in the special purpose company as well as covering up for market losses while taking profit upon market gains. In general, TRS deals are often preferred to minimize financial burden of takeover funds. In the case of Hyundai Motor, the swap deal would allow the Korean auto giant to minimize financial burden of directly spending 600 billion won on stake purchasing.

Once the sale of 20 percent stake in Hyundai Capital is complete, the more than a decade-long partnership between Hyundai Motor and GE Capital will come to an end. GE Capital entered the Korean market in 1995 by acquiring a local finance company. In 2004, it signed a partnership deal with Hyundai Motor and invested 620 billion won in Hyundai Capital, and in the following year, 670 billion won in Hyundai Card. Since last year, GE has been actively engaged in disposing financial assets of its non-core businesses as part of restructuring, including those in Hyundai Capital and Hyundai Card.

By Kim Hyo-hye

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