세계1.2위 조선사, Why Hyundai Heavy wants to buy DSME?

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Why Hyundai Heavy wants to buy DSME?

Posted : ‘19-01-31

A vessel built by Hyundai Heavy Industries / Courtesy of Hyundai Heavy Industries
By Nam Hyun-woo

Hyundai Heavy Industries Holdings CEO Kwon Oh-gap

Hyundai Heavy Industries (HHI) plans to acquire Daewoo Shipbuilding & Marine Engineering (DSME) to help enhance its global competitiveness and prevent dumping among local shipbuilders, industry analysts said Thursday.

As DSME's largest stakeholder Korea Development Bank (KDB) decided to hand over its stake to HHI in return for a share in an envisioned merged firm, it said HHI's financial burden has lowered, but controversy may stir over DSME's true corporate value and KDB's failure to pay back taxpayers' money.
According to Korea Development Bank (KDB), the state-run lender signed an MOU with HHI over selling the shipbuilder its 55.7 percent stake in DSME.

Under the deal, KDB will hand over its DSME stocks to a new corporate body that will be set up by HHI. In return, the lender will receive the new body's stocks worth 2.1 trillion won.

"The M&A deal came after HHI and KDB both recognized the necessity to reform the shipbuilding industry," KDB Chairman Lee Dong-gull said. "We took this measure to avoid both DSME and HHI from suffering deeper financial troubles."

Lee added the bank will remain as the No. 2 stakeholder in the new body and collect its investment in the long term.

If HHI and KDB reach a final deal, it will lead to a merger between two of the world's top shipbuilders, depending on the portion of the traded stake.

According to market tracker Clarksons Research, HHI Group has 11,145 compensated gross tonnage (CGT) in its backlog at the end of last year, followed by DSME with 5,844 CGT. CGT is an indicator of the amount of work required to build a ship.

If the two companies merge, their combined backlog of 16,989 CGT will be three times greater than that of No. 3 shipbuilder Imabari Shipbuilding of Japan with 5253 CGT, meaning HHI can consolidate its status as the world's leading shipbuilder.

The move came amid growing calls for reforming the domestic shipbuilding industry from the current big three companies ― HHI, DSME and Samsung Heavy Industries ― to two firms. DSME CEO Jung Sung-leep has also supported the idea, calling the big two structure "desirable."

HHI and DSME have similar portfolios comprised of liquefied natural gas (LNG) ships, very large crude carriers (VLCCs) and naval vessels. If the two companies are merged, those overlapping businesses could be reorganized for better efficiency.

"Ultimately, the restructuring into the big two structure will prevent shipbuilders' chronic oversupply and cutthroat competition between the three firms," SK Securities analyst Yoo Seong-woo said.

"However, the merger can pose adverse impact on HHI and its investors, because the value of DSME shares can be seen as inflated because of its perpetual bond."

Daewoo Shipbuilding & Marine Engineering CEO Jung Sung-leep

At the end of the third quarter last year, DSME's equity amounts to 3.6 trillion won and 2.3 trillion won of them is perpetual bond, which refers to bonds with no maturity date. Though bonds are an instrument showing the issuer's indebtedness, perpetual bonds are treated as an equity, not a debt, because it does not require the issuer to redeem the principal.

"The current DSME share price is based on the recognition its perpetual bond is an equity," Yoo said. "When we count the bond as a debt, buying DSME at around 2 trillion won is too expensive."

Reflecting such a view, the shares of HHI Holdings, the group's holding firm, were trading at 357,000 won as of 1:30 p.m., Thursday, down 4.93 percent from a day earlier. HHI also declined by 2.77 percent to 140,500 won, down 2.77 percent.

KB Securities analyst Kim Se-yong added that an M&A between companies leading an industry generally requires major governments' consent, due to antitrust issues. "The fact that DSME has received aid from the Korean government could be a major talking point in drawing consent from other countries," he said.

The acquisition is also drawing backlash from HHI union members. The union said that it decided to postpone a vote on their salary negotiation with the management until it can confirm‎ the impact on its members.

"When the company acquires DSME, the stability of overlapping jobs is threatened, negatively impacting members' working conditions," the union said. "It is unreasonable that the company is spending a fortune to acquire a large company, even though it carried out massive restructuring citing aggravated management conditions."