Prerequisites Exist for KAL’s Takeover of Asiana
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
With KAL’s decision to take over Asiana now official, the air transportation industry’s competitive landscape is beginning to reshape. From a mid/long-term perspective, competitive intensity is expected to ease on a decrease in the number of airlines. In the short term, however, as there are prerequisites which must be satisfied before the acquisition is finalized, we advise taking caution towards likely share price volatility expansion for domestic airlines.
Take note of prerequisites for KAL’s takeover of Asiana and other potential issues
Korean Air (KAL) has decided to take over Asiana Airlines (Asiana). The Korean Development Bank (KDB) is to invest W800bn (W500bn in capital increase via third-party allotment and W300bn in exchangeable bonds) in Hanjin KAL. Hanjin KAL is to lend W800bn to KAL, with KAL then acquiring W1.5tn-worth of Asiana shares via issuance of new stocks worth W2.5tn. When the acquisition is completed, corporate governance structure will take the form of Hanjin KAL ― KAL ― Asiana, with KAL owning 63.9% of Asiana.
Prerequisites to complete the acquisition include: 1) KAL expanding its number of shares available for issuance via changes to the articles of incorporation; 2) Asiana achieving shareholders’ resolution regarding capital reduction without refund; and 3) approval by the FTC and M&A review boards of other countries.
Future issues to keep an eye on include: 1) possible legal issues raised by KCGI regarding third-party allocation for Hanjin KAL; 2) potential conflicts between management and labor unions at both KAL and Asiana; 3) progress in KAL’s capital increase attempt; and 4) reductions in redundant services and manpower between KAL and Asiana.
Ease in mid/long-term competitive intensity is positive, but be cautious of greater short-term share price volatility
Assuming the acquisition is successful, international passenger M/S for KAL should climb to 37.5% (sum of 2019 M/Ss of KAL and Asiana; 48.9% if including the companies’ LCC subsidiaries). Poised to stand as the only domestic FSC, KAL’s M/S is all but certain to expand. It is also positive that yield competition intensity should ease on supply reduction stemming from industry restructuring. However, there is some concern over share price dilution for KAL shareholders, as the capital for acquisition is to be financed via paid-in capital increase. Uncertainties are also present regarding the amount of time needed for synergies to solidify between the two firms in the absence of planned restructuring.
Of note, KDB has expressed a desire to see further industry restructuring among domestic LCCs, for example via the formation of an integrated company encompassing Air Busan, Air Seoul, and Jin Air. It appears that reshaping of the competitive landscape of the air transportation industry is starting in earnest, centering on KAL and subsidiary Jin Air. It is positive that mid/long-term competitive intensity is set to soften. However, considering the prerequisites for KAL’s takeover and potential issues in the process of completing industry restructuring, we advise caution regarding near-term share price volatility.