Unexpected Hurdle
Foreigners’ equity in defense contractor Korea Aerospace Industries (KAI) nearly doubled to over 20 percent over the past two months. Such a high ratio of foreigners’ equities may give trouble to the Korea Development Bank (KDB)’s sell-off of its equities in the military hardware developer.
According to industry sources on March 22, as foreign investors accepted block deals from major shareholders, foreigners’ equities in KAI grew to 22.8 percent from 15.2 percent at the beginning of this year. Hyundai Motor announced on March 21 that the company sold off 4,873,756 (5.01 percent) of its 9,747,511 shares (10 percent) of KAI in the block deal system. According to the IB industry, 4.4 million or more than 90 percent of them were purchased by multiple foreign institutional investors.
Prior to Hyundai Motor, in January, Hanwha Techwin and DIP Holdings, a subsidiary of Doosan, sold off 3.9 million shares (4 percent) and 4,873,754 shares (4.99 percent), respectively. At that time, most of them went to foreign institutional investors.
The Defense Industry Act and the Act on the Promotion of Foreign Investment do not have any clause that limits foreigners’ total equities in a Korean defense contractor. But if a single shareholder obtains 50 percent or more equities or an equity ratio which guarantees a management control, it has to receive the approval of the Ministry of Industry, Trade and Resources in accordance with an ordinance of the Ministry of National Defense. In addition, to buy 10 percent or more, the buyer’s purpose of buying them should be reviewed.
“The Korean government will not approve a single organization’s purchase of equities in a Korean defense contractor since the Korean government will not allow the managerial right of a major defense contractor to be transferred to a foreign company,” said a representative of the defense industry. “But in the event that foreign companies or institutional investors teams up to buy small amounts of equities (less than ten percent), no method will be able to stop them.”
Already, during Hanwha Techwin’s block deal, US-based Vontobel Asset Management secured 5.1 percent equities. Vontobel Asset Management made it clear that they bought the KAI equities for long-term investment purposes and had no intention to take part in the management of KAI. Foreigners’ equities in KAI are at the highest level in the defense industry and higher than those of LIG Nexone (14.27 percent), Hanwha Techwin (9.87 percent) and Poongsan (11.89 percent).
An increase in foreigners’ equities is expected to delay the sell-off of equities by the Korea Development Bank which is the largest shareholder with a 26.75 percent stake. With no dominant player that expressed the will to buy the equities from the bank, a way that the Korea Development Bank may take is to break the equities into small units and sell them.
But in this case, the Korean government will be concerned about an increase in foreigners’ equities. It is highly likely that the Korean government will object the KDB’s sell-off of its equities in KAI since the sell-off may put KAI in trouble in terms of management as long as there is no strategic investor that shows interest in taking over the equities.
Another variable is the fact that there is a presidential election between now and 2019 by which the KDB will sell off its equities. A government change may change the sell-off plan.
“It is expected that foreigners who expect that KAI will win the T-X project which will replace trainers of the US Air Forces with new ones in 2017 will increase their equities in KAI,” the representative said. “If the stock price of KAI skyrockets after winning the project, it will become virtually impossible for the KDB to sell off its equities.”