POSCO, the world’s fifth-largest steelmaker, is expected to drive a bold downsizing of noncore affiliates and seek initial public offerings of key business arms to improve its financial health and reinforce its core business.

Company chairman Kwon Oh-joon, who was inaugurated in March, outlined Monday his reform plans during an investor relations session in Yeouido, Seoul.

One of the key parts of the reform is downsizing fringe business units by merging overlapping businesses and selling noncore affiliates.

“Some of the group’s noncore affiliates will be shut down in the course of our business restructuring,” the chairman said. 

Following the restructuring, POSCO will have seven core business areas ― steel, materials, energy, construction and infrastructure, trade, services and others.

Industry watchers forecast that more than 10 affiliates would be merged internally or sold off. Currently, POSCO has 46 affiliates in various sectors.

The top executive also said he could consider selling partial stakes in Daewoo International, the firm’s largest affiliate when attractive deal conditions are proposed.

“Regarding a possible sale of Daewoo International, I can say we are open to attractive deal proposals. But nothing has been fixed yet for now,” the chairman said.

The steelmaker took over a 68.15 percent stake in the trading company in 2010 at a cost of 3.37 trillion won ($2.8 billion).

Daewoo International is strong in natural resource development projects and operates gas fields in Myanmar. But the operations appear to have financially burdened the group, as it failed to create synergy with other affiliates. Daewoo’s operating profit plunged 16 percent in 2013 from 2012.

To further improve the company’s financial health, Kwon said POSCO could seek initial public offerings of key affiliates.

Industry watchers said POSCO Energy and POSCO Engineering and Construction could be strong candidates for the IPOs.

POSCO Energy is the nation’s largest independent power producer, with sales of 2.9 trillion won last year. POSCO E&C is one of the top five builders in Korea with expertise in the construction of steel mills and thermal power plants. Both business arms had previously withdrawn stock offering plans due to the prolonged global economic downturn.

POSCO chairman did not give further details of the IPO plans during the IR session.

POSCO’s cash flow has been worsening over the past few years under growing debt. The steelmaker’s outstanding debt reached 40.58 trillion won as of March, a 5 percent increase since the end of last year. The steel giant’s debt ratio stands at 89.6 percent, up 5.3 percentage points over the cited period.

“The top management is setting up goals to raise the group’s credit and debt ratings,” a company official said.

Global credit rating agency Standard & Poor‘s downgraded POSCO’s credit and debt ratings to “BBB+” from “A-” in 2012.

“POSCO has no choice but these cost-cutting measures, including downsizing and investment cuts, and also IPOs, as it must find a way to improve its financial health amid sluggish business conditions in the steel industry,” a stock analyst said.

Over the past several years, the steel sector has been suffering from a global oversupply that has been squeezing steelmakers’ margins.

On a consolidated basis, POSCO’s first-quarter operating income dropped 1.7 percent to 731 billion won and its sales also sank 6.6 percent to 15.44 trillion won during the first quarter of this year from the same period last year, company data showed.

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