Many Problems Still Remain After Contract Signing

Hyundai Heavy Industries Co. is set to sign an official deal with Korea Development Bank (KDB)  to take over Daewoo Shipbuilding & Marine Engineering Co. (DSME).

Hyundai Heavy Industries Co., the world’s largest shipyard by sales, is set to sign an official deal with Korea Development Bank (KDB) on March 8 to take over Daewoo Shipbuilding & Marine Engineering Co. (DSME). However, Hyundai Heavy will still have a lot of problems to solve in order to completely acquire DSME after signing the official contract.

As announced in January, Hyundai Heavy will establish an intermediate holding company that will control its shipbuilding units, including the newly acquired DSME. KDB will secure an 18 percent stake in the new company by contributing its 100 percent stake in DSME, which is worth 2.10 trillion won (US$1.86 billion).

KDB will receive 1.25 trillion won (US$1.11 billion) worth of redeemable convertible preference shares (RCPS) and 850 billion won (US$752.55 million) worth of ordinary shares of the envisioned intermediate holding company. Hyundai Heavy Industries Holdings will become the largest shareholder with a 28 percent stake and the KDB the second largest shareholder with an 18 percent stake.


Hyundai Heavy Industries Holdings’ stake in the proposed intermediate holding company may increase if DSME’s corporate value falls in due diligence.

The next issue is 1.50 trillion won (US$1.33 billion) worth of capital increase for DSME. As agreed, Hyundai Heavy Industries Holdings, the largest shareholder, will invest a total of 400 billion won (US$354.14 million), while the second largest shareholder, KDB, and other major shareholders, including the National Pension Service (NPS) and KCC, will fund 800 billion won (US$708.28 million). However, it is still uncertain that minority shareholders, which are estimated to own around 40 percent of the company’s stock, will participate in the capital increase.


It also still remains uncertain that the NPS and KCC will participate in the capital increase. An official from Hyundai Heavy said, “Hyundai Heavy currently has 2.50 trillion won (US$2.21 billion) of cashable assets and Hyundai Heavy Industries Holdings holds plenty of cash as well. If there are forfeited shares, the largest shareholder will cover insufficient funds through the allotment to a third party.”

The last issue that Hyundai Heavy Industry Group must deal with is the evaluation of the merger proposal by major countries, such as the United States, the European Union, China and Japan. During a press conference on March 6, Chung Mong-joon, chairman of the Asan Foundation and the largest shareholder of Hyundai Heavy Industries Holdings, said, “The countries evaluate and decide whether a merger is good for the local industry,” hinting that it is the biggest issue in the merger.

The key is a high share of the LNG shipbuilding market. Dr. Hong In-sun from the Korea Institute for Industrial Economics & Trade said, “Herfindhal-Hirschman Index (HHI), which represents the degree of market concentration, is the standard for examination. Taking a look at only other vessels, including bulk ships and container ships, there is no concern over monopoly in terms of HHI. But, the index goes up to an alarming level when including LNG ships.”

In fact, the two companies won orders for 42 vessels – 25 from Hyundai Heavy and 17 from Daewoo Shipbuilding – from January to November last year, accounting for 65 percent of the total global orders of 65. They also won orders for four LNG ships – one from Hyundai Heavy and three from Daewoo Shipbuilding – this year, taking up one third of the total global orders of 12. However, a spokesperson of Hyundai Heavy Group said, “Unlike other consumer goods, buyers set the the price of ships. There will be no problem.”

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