More Loss Than Gain
There is growing concern about Hyundai Group’s move to sell its LNG business unit, the main business of Hyundai Merchant Marine (HMM).
Industry analysts are saying that the sale of the business unit estimated at more than 1 trillion won can be helpful for securing liquidity for the time being. However, the losses, including aggravated profits, are more likely to far outweigh the potential benefits by losing its core business that generates stable cash. They believe that even though preemptive restructuring is important, the group should maintain the minimum amount of sales capacity not to make itself an empty shell. In other words, Hyundai ought to control the speed of its restructuring.
Some in the industry point out that HMM, which experienced liquidity problems in 2002, might repeat the past, where its auto carrier business sold to overseas companies as demanded by creditors grew as the golden goose in the end.
According to sources in the financial and shipping industries on Feb. 9, Hyundai Group is proceeding with its plan to sell its LNG business unit, as evidenced in its selection of M&A advisory firms through its main creditor, Korea Development Bank. Last December, the group announced its measure to avoid a liquidity crisis valued at 3.3 trillion won (US$3.1 billion) and its plan to sell some of its LNG business and bulk carrier units.
However, the industry already raised concerns about the Hyundai’s move. They worry about the possibility that its sales capacity will be destroyed with the sale of its core business units, even though the disposal of assets is unavoidable to save itself from bankruptcy.
A source in the shipping industry said, “One of the principles of corporate restructuring is to sell off core assets. But if HMM sells its LNG business unit, it will actually lose a cash-generating business.” The source added, “The asset disposal can be helpful to solve liquidity problems. However, it is more likely to be harmful to the company if the market slowly recovers. With the slow recovery of the market, its competitiveness will suffer due to a decrease in sales capacity.”
HMM is in a 20-year contract with the Korea Gas Corporation (KOGAS) to provide the LNG carrier service with seven out of its eleven vessels. The LNG carrier operator is paid around 5 billion won (US$4.7 million) in the Middle East and about 2 billion won (US$1.8 million) in South Asia per LNG shipping, which indicates that the business unit can generate cash in a stable and steady manner. Therefore, the LNG unit is considered to be two of the most core businesses among those intended for asset disposal, along with Hyundai Securities.
The problem is that what will happen after the sale of the core business unit, when the group no longer has a source of steady profits. Currently, the main business of the Korean logistics company is its bulk carrier unit, with a tendency to fluctuate in profits, depending on shipping market conditions. After selling off its LNG business unit, the company is likely to more rely on its unpredictable business.
Therefore, experts are saying that the disposal of core assets is important to prevent liquidation, but the LNG business unit that is related to the survival of the company ought to be preserved. Another industry source remarked, “If HMM sells its LNG business, it will only have the bulk carrier unit, which is vulnerable to market fluctuations.” The source concluded by saying, “It is important for the firm to faithfully carry out its plan to save itself from bankruptcy. But the company also needs to keep the minimum amount of sales capacity for its survival.”