Harim Selected as Preferred Bidder for HMM

On Dec. 18, Korea Development Bank (KDB) and the Korea Ocean Business Corporation (KOBC) announced the selection of the Pan Ocean-JKL consortium as the preferred bidder for the acquisition of the management rights of HMM, the largest ocean container shipping company in South Korea. After negotiations on specific contract conditions, the finalization of Harim’s acquisition of HMM is expected in the first half of next year.

Harim has emphasized its bulk carrier business experience as a synergy factor in the acquisition of HMM. Positioning Pan Ocean, the leading domestic company, as the acquiring entity, it aims to leverage Pan Ocean’s existing fleet of 301 vessels as of the end of June this year. The acquisition of HMM is anticipated to facilitate the sharing of operational networks and global shipping networks, enabling economies of scale in areas such as vessel fuel and maintenance management.

As container ships and bulk carriers operate in distinct markets, there is an expectation that the diversification could help mitigate the volatility in each market. As of last year, HMM generated 93.1 percent of its revenue, or 17.31 trillion won (US$13.28 billion) from container shipping, with only 5.9 percent, or 1.09 trillion won, coming from bulk carrier operations. During the same period, Pan Ocean’s revenue from bulk carrier operations amounted to 4.82 trillion won. Combining the revenue structures of both companies, the proportion of container shipping to bulk carrier operations improves to a 3:1 ratio.

However, the acquisition of HMM comes with significant internal and external risks. Navigating through the shipping industry downturn caused by economic slowdown and container shipping oversupply poses a formidable challenge for Harim Group, which has charted the course for HMM. Furthermore, the looming threat of intense competition due to the dissolution of the world’s largest shipping alliance – MSC and Maersk – adds another layer of complexity to the situation.

The primary risk lies in the global economic downturn, which has led to a downturn in the maritime industry. The Shanghai Containerized Freight Index (SCFI), a key indicator of ocean freight rates, sharply declined to 886 from 1,043 in the third quarter of this year, roughly a quarter of the level during the same period last year. In the third quarter of this year, HMM recorded an operating profit of 75.8 billion won, marking a 97 percent decrease compared to the same period last year’s 2.6 trillion won. The outlook for HMM’s operating profit this year is around 600 billion won, anticipating a reduction of over 90 percent compared to the previous year. Other global shipping companies such as Denmark’s Maersk, Israel’s ZIM LINE, and Taiwan’s Wan Hai have also turned into deficits. This is why the primary concern arises from the “winner’s curse,” which poses a risk to the entire group.

Amid these challenges, it was confirmed earlier this year that the dissolution of the “2M” maritime alliance, consisting of the world’s top two shipping companies by market share -- Switzerland’s MSC and Denmark’s Maersk -- will take place in 2025. The breakdown of the balance maintained by the three alliances, 2M, Ocean Alliance, and The Alliance, is anticipated to intensify industry competition and lead to a decline in freight rates.

In addition, Harim faces considerable financial costs associated with the substantial funds to be raised for the HMM acquisition. With waiving requirements such as the conversion of convertible bonds into stocks by a 3-year deferral, the fundraising amount has increased by nearly 300 billion won, inevitably leading to a greater financial burden due to significant borrowings. For now, Harim Group plans to secure approximately 3 trillion won of the acquisition funds through various means, including the liquidation of Pan Ocean’s ship assets, issuance of 500 billion won in perpetual bonds, and capital increases in affiliate companies.

HMM’s labor union is opposing the hasty sale to the financially vulnerable company, arguing that it will undermine the national competitiveness in the maritime industry. It particularly questions whether the motivation is to target the substantial retained earnings held by HMM. As HMM achieved its highest-ever operating profit last year, it currently has approximately 14 trillion won worth of liquid assets. In contrast, Harim’s current liquid assets stand at around 1.6 trillion won as of the first half of this year.