2 Trillion Deal
The Samsung Group is selling Samsung Techwin, Samsung Thales, Samsung Fine Chemicals, and Samsung Total to the Hanwha Group so as to withdraw from the petrochemical and defense industries, where it has failed to make profits, and concentrate its corporate resources on electronics, construction, and finance. The disposal is expected to help simplify the group’s governance and shareholding structures, too.
The package deal was suggested by Hanwha this past spring. At that time, Hanwha was trying to reinforce its defense business capabilities, and began to take note of Samsung Thales. The Samsung Group, amid business structural reorganization, asked Hanwha to purchase its 32.4 percent of shares in Samsung Techwin, the parent company of Samsung Thales.
The scale of the M&A negotiations that kicked off in the defense sector grew due to the complex shareholding structures among Samsung’s subsidiaries. Samsung Techwin owns 50 percent of the shares of Samsung Thales, and is the second-largest shareholder (22.73 percent) of Samsung General Chemicals, following Samsung C&T (37.28 percent). Samsung General Chemicals owns half of Samsung Total. This means that the acquisition of Samsung Techwin is connected to Samsung General Chemicals and Samsung Total as well as Samsung Thales.
“The two groups are sharing the same interests in this contract, that is, Samsung can dispose of the less profitable defense and petrochemical business units, and Hanwha can beef up its major business through the takeover,” said an industry expert.
Hanwha to Grow in Stature
In the meantime, the Hanwha Group is expected to become the top defense and petrochemical company in Korea with the deal. In addition, the four subsidiaries’ combined assets of 13 trillion won (US$11.8 billion) are predicted to increase Hanwha’s total assets to over 50 trillion won (US$45 billion), so it ranks ninth among major business groups in Korea, overtaking the Hanjin Group.
Hanwha has been involved in the defense and chemical businesses since it was founded. Its name itself is a contraction of the words “Korean” and “gunpowder” in the Korean language. Even now, these are highly important for its future growth momentums. Also, the reinforcement of these businesses has been very significant for its photovoltaic and advanced materials businesses that the group is concentrating on these days. In this vein, it was planning to better utilize Samsung Techwin’s capabilities in fighter jets, helicopter engines, and robot manufacturing.
The problem was the complex shareholding structure that Samsung Techwin was involved in. Samsung Techwin was intertwined with the Samsung Group’s petrochemical subsidiaries by owning, for example, 22.7 percent of Samsung General Chemicals. Hanwha could not acquire all of them. In the end, both parties agreed to Hanwha Chemical’s acquisition of the petrochemical business unit of Samsung. Hanwha Chemical was positive about the takeover, and the targets of the deal came to cover all of the defense and petrochemical subsidiaries of Samsung.
Hanwha, which recorded sales of 1.0184 trillion won (US$924.22 million) in the defense sector last year, is sure to become the largest weapon manufacturer in Korea thanks to the contract because the sales of Samsung Techwin (963 billion won) and Samsung Thales (617.6 billion won) are added. In 2013, the top three in the industry were Korea Aerospace Industries (1.345 trillion won), LIG (1.208 trillion won) and Samsung Techwin.
Moreover, the takeover is to complete the vertical integration of Hanwha’s guided weapon systems, as Hanwha’s competitiveness in the warhead, driving, and propulsion fields will be combined with that of Samsung Techwin in monitoring and recon. Hanwha is forecast to work more aggressively on robotics systems by using the resources of Samsung Techwin, too. The 10 percent KAI shares of Samsung Techwin go to Hanwha as well, which means it could be engaged in aircraft manufacturing in the long term.
Hanwha is about to become number one in the petrochemical industry, too. The sales go up to approximately 18 trillion won (US$16.3 billion), slightly higher than those of LG Chem (17.5452 trillion won, or US$15.9161 billion as of the end of 2013). Samsung General Chemicals have produced purified terephthalic acid for polyester, and Samsung Total has produced polyethylene, polypropylene, styrene monomer, paraxylene, and other chemicals.
At the same time, Hanwha’s ethylene production volume increases to 2.91 million tons, the ninth-highest worldwide, so that economy of scale and price competitiveness can be ensured in its petrochemical business. Samsung Total is also expected to allow Hanwha to restart its oil refining business after 17 years.