The Hanwha Group is going to come up with a plan for reducing intra-group transactions involving Hanwha S&C within this week. Under the circumstances, much attention is being paid to how it will lead to the group’s governance reform and corporate succession in the long term.
Hanwha S&C, which is controlled by Hanwha Group Chairman Kim Seung-yeon’s three sons, is a system integration (SI) company. The subsidiary has caused controversy over excessive intra-group transactions. In order to handle the controversy, the group split off the IT service business unit of the subsidiary, sold 44.6% of Hanwha S&C shares for 250 billion won to a STIC Investment consortium and changed the name of the surviving corporation to H-Solution last year.
In March this year, however, the Korea Fair Trade Commission (KFTC) did not rule that intra-group transactions were reduced in the group, saying that only the direct control over Hanwha S&C was changed into indirect control as a result of the process. What the group is planning to do now after the ruling is to completely remove the controversy by reducing the three sons’ shares in Hanwha S&C. The group itself admits this point, too. In fact, it promised to do so during the split-off.
Those in the business community are predicting that the group’s governance reform may take the form of a merger between H-Solution and Hanwha Corporation, listing of Hanwha S&C, or sale of Hanwha S&C shares. The merger is attractive in that the three sons’ control over the entire group can be enhanced. Still, disputes may arise with regard to a merger ratio and the enterprise value of H-Solution, a non-listed company, cannot be calculated with ease.
Listing of Hanwha S&C should be done anyway because listing within five years was a condition during the share sale to the STIC Investment consortium. If external investors flow in during the course of listing, the largest shareholders’ holding will be naturally lowered and the controversy will be easily removed. In order to do so, however, the group should win over existing investors in that the timing of its IPO for the purpose of governance reform may not correspond to the timing when its enterprise value is at its highest. Besides, the South Korean government is unlikely to be content with the IPO because it is a promise already made and can be no new solution.
In the end, the most probable scenario as of now is additional share sale for a shareholding of 20% or less. Still, the group is yet to decide whether to sell the shares to external investors or subsidiaries. More recently, equity dilution based on a merger between Hanwha S&C and Hanwha Systems, Hanwha Techwin’s fully-owned defense subsidiary, has been mentioned by some experts. The others, however, are saying that the Hanwha Group has little to gain from the merger.