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Collapsed merger’s silver lining: More cash for Hyundai Heavy
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Collapsed merger’s silver lining: More cash for Hyundai Heavy

Daewoo Shipbuilding, in turn, could face liquidity risk without the promised fund inflows from Hyundai

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Jan 14, 2022 (Gmt+09:00)

The EU has blocked the mega-merger of Hyundai Heavy and Daewoo Shipbuilding, citing monopoly concerns.
The EU has blocked the mega-merger of Hyundai Heavy and Daewoo Shipbuilding, citing monopoly concerns.

The European Commission’s rejection of Hyundai Heavy Industries Co.'s proposed merger with crosstown rival Daewoo Shipbuilding & Marine Engineering Co. may not be smarting as much as originally feared.

It shouldn't be hard for Hyundai Heavy, the world’s largest shipbuilder, to find a silver lining from the collapsed deal, on which the South Korean company saved as much as 6 trillion won ($5.1 billion) it otherwise would have spent to acquire the debt-laden competitor.

A Hyundai Heavy official said on Friday it would not call off its planned merger with Daewoo Shipbuilding until it receives official notice from the EC. However, the market widely believes the deal breakdown is a foregone conclusion.

The European Commission’s logic was that the combination of the world’s two largest shipbuilders would particularly hurt competition in the global LNG carrier business, which is more profitable than the oil tanker and container ship sectors.

Despite the apparently bad news, however, shares of Hyundai Heavy rose as much as 4.7% before closing 0.5% higher at 106,000 won on Friday. Daewoo Shipbuilding finished unchanged at 25,250 won.

Analysts said investors bought into the view that the collapsed deal has cleared financial uncertainty for Hyundai Heavy, which has been expanding into more expensive eco-friendly shipbuilding.

“The deal collapse is credit positive for Hyundai Heavy Industries,” said Kim Hyun-joon, a senior researcher at Korea Investors Service, a unit of Moody’s Investors Service. “Hyundai’s inclusion of DSME would have hurt its credit rating. Now that the deal’s fallen through, it can spend the money somewhere else for organic growth.”

Hyundai Heavy shipyard
Hyundai Heavy shipyard

When Hyundai Heavy signed an agreement in 2019 to acquire a 55.7% stake in Daewoo Shipbuilding from the state-run Korea Development Bank (KDB) for 2 trillion won ($1.7 billion), it also promised to inject 1.5 trillion won into Daewoo to buy the latter’s new shares via a rights offering.

Hyundai also offered to cough up 1 trillion won, if necessary, to help improve Daewoo’s financial status after the acquisition. A total of 6 trillion won, including the money needed to take over Daewoo’s debt, would have been required for the deal, analysts said.

LIQUIDITY RISKS FOR DAEWOO

Meanwhile, Daewoo Shipbuilding may face liquidity risk if it does not find another buyer soon.

“The expected 1.5 trillion won in rights offering came to nothing. That could raise concerns about Daewoo’s financial stability,” said a KB Securities analyst.

With the shipbuilding industry making a strong post-pandemic recovery, Daewoo Shipbuilding's labor union and company officials have voiced confidence about remaining a standalone entity, which its main creditor KDB doubts.

Despite its growing order backlog amid the anticipated shipbuilding supercycle, the orders cash-strapped Daewoo has received will translate into profits two to three years later.

An LNG carrier built by Daewoo Shipbuilding
An LNG carrier built by Daewoo Shipbuilding

The EU’s opposition to the mega-merger would send the Korean government’s planned restructuring of the local shipbuilding industry back to the drawing board.

The government has pushed for the full privatization of Daewoo Shipbuilding to recover taxpayers’ money and has worked to streamline the shipbuilding industry through a merger to tighten its lead over rival shipbuilders, particularly those in China.

Next week, the KDB and other Daewoo Shipbuilder creditors are expected to come up with ways to find a new owner of the company.

Under possible scenarios, Daewoo’s creditors could separate the shipbuilder’s prime assets from bad debt and put the quality assets up for sale, or sell the company in its entirety to a foreign buyer or a private equity firm.

In any case, industry watchers said, Daewoo Shipbuilding would be a victim of the collapsed deal as the company has already disclosed its advanced membrane LNG tanker design technology to Hyundai.

Write to Kyung-Min Kang and Jung-hwan Hwang at Kkm1026@hankyung.com

In-Soo Nam edited this article.
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