Lim Jong-ryong, chairman of the Financial Services Commission (FSC) of South Korea, said on March 21, “Merger and acquisition (M&A) is the ultimate goal of restructuring of Daewoo Shipbuilding & Marine Engineering (DSME).” In this regard, DSME will sell the entire business together with its defense unit next year. This is because it is impossible to separate the process of merchant vessels and military vessels and it will be easier to sell the company with lucrative business which is the defense unit.
The M&A will be pushed ahead starting from next year. Creditors and the authorities agree that it is difficult to seek radical reform when the state-run Korea Development Bank (KDB) is DSME's main creditor bank and largest shareholder.
The company will be sold entirely at the same time. About 75 percent to 80 percent of the production process of merchant vessels and fighting vessels are same. In order to separate the defense sector, the company has to establish a new production factory, which takes 100 billion won (US$89.33 million) and two years. In particular, DSME’s labor union is said to strongly oppose to the separation of defense sector. Since the defense unit is the company’s cash cow, it will be harder to sell the remaining businesses without the sector.
Industry sources expects that DSME will not be sold to global companies because it has decided to sell the entire business at the same time. There is a controversy over the outflow of engineers and experts depending on how to deal with DSME even now. At the moment, the remaining “Big 2” – Samsung Heavy Industries and Hyundai Heavy Industries – or other domestic conglomerates are highly likely to buy DSME. Various methods of the acquisition are also being discussed such as stock purchase and stock exchange.
DSME will also improve its structure by downsizing. The company plans to reduce sales by up to 40 percent from the current level in the medium and long term. The company’s sales last year stood at 12.74 trillion won (US$11.38 billion). DSME will also consider the appropriate level of workforce in line with changes in sales except for key workers in research and development (R&D). It means that there will be a lot of companies trying to take over DSME when it becomes smaller and financially sound.
DSME is considering handling with more than half of its bonds through a debt-for-equity swap. Kim Hae-young of Democratic Party of Korea said, “According to the report of the FSC, there is a plan to convert over 50 percent of its bonds to equity according to extent of responsibility of the parties interested and extend the maturity of the remaining bonds.”