Controversy Arises Again Over Financial Strength of 3 Potential Buyers in HMM Acquisition

As the three-way compressed battle for the acquisition of HMM involving Harim Group, LX Group, and Dongwon Group intensifies, the possibility of candidates with insufficient cash assets making a successful acquisition has increased. This has raised questions about their financial capabilities and the resources they can mobilize for the acquisition.

According to industry sources on Sept. 6, Korea Development Bank (KDB) and the Korea Ocean Business Corporation (KOBC), the major shareholders of HMM, have selected Harim, LX, and Dongwon as qualified candidates for the sale of HMM’s management rights. Although Hapag-Lloyd had the most substantial financial strength, it was ultimately disqualified in this evaluation due to increasing opposition to the overseas sale of a South Korean shipping company.

KDB is set to conduct due diligence over the next two months. It will share HMM’s financial status and business details with the candidate companies, and after going through the final bidding process it will select a preferred negotiating partner and conclude the acquisition contract.

With the anticipation of a three-way competition involving Harim, LX, and Dongwon, concerns have arisen regarding their ability to raise sufficient cash. As there is a high likelihood of these companies acquiring HMM through external funding, there are worries that their focus might shift more towards recovering their investment rather than investing for the essence of the industry.

As of the first half of this year, the cash assets of these companies stand at 1.5 trillion won (US$1.12 billion) for Harim, 2.5 trillion won for LX, and 600 billion won for Dongwon. However, these amounts fall significantly short of the expected acquisition price for HMM, even reaching only half of it.

Consequently, these companies are considering filling the shortfall in acquisition funds by seeking financial investors who can provide the necessary capital or by using HMM’s assets as collateral to secure the additional funds. In such a scenario, investments for the growth of the acquired HMM could take a back seat, as servicing the interest alone on a 3 to 4 trillion won debt, borrowed at an annual interest rate of around 8 percent, would amount to 300 billion to 400 billion won per year, placing a significant burden on the companies.

Ultimately, the company acquiring HMM may need to absorb HMM’s cash assets of 14 trillion won in order to pay back borrowed principal and interest accrued during the acquisition process. This could potentially be achieved by increasing dividends or accelerating the transfer of assets.

Another challenge is how to handle the remaining 1.68 trillion won in perpetual bonds issued by KDB and the KOBC. Converting these perpetual bonds into stocks could yield returns of over three times the original value, making a stock conversion essential to avoid excessive financial burdens.

If the conversion of perpetual bonds into stocks gains momentum, the acquiring company of HMM will need to allocate additional cash to purchase these bonds. From the perspective of the acquiring company, this raises the likelihood that HMM’s cash assets could be used for purchasing the perpetual bonds.

An official from the industry said, “The situation could arise where the acquiring company may need to repurpose the cash assets that should have been used for the development of HMM, potentially putting the acquisition deal at risk.”