S.Korean Hanwha Group Set to Acquire Daewoo Shipbuilding in a $1.39 Billion Stock Deal

South Korea's Hanwha Group signed a conditional memorandum of understanding (MoU) with Daewoo Shipbuilding & Marine Engineering (DSME) to acquire a controlling stake of 49.3% and managerial control of the shipbuilder.

DSME has been under state supervision for 21 years. Hanwha’s six affiliates -- including its defense unit Hanwha Aerospace and an energy equipment company, Hanwha Systems Co. -- will purchase DSME’s newly issued stocks worth 2 trillion won ($1.39 billion), according to the state-run Korea Development Bank (KDB). The lender currently holds a 55.7% stake in the shipbuilder. Its stock ownership will be reduced to 28.2% once Hanwha’s stock acquisition is completed, officials told The Korea Herald.

Though the deal is set to proceed as a stalking-horse bid, which designates Hanwha as a preferred bidder, any investor with more favorable conditions can enter the competitive bid before the deadline on Oct. 17, said KDB Chairman Kang Seog-hoon during a press conference held Monday afternoon. The bank plans to forge a formal agreement with Hanwha within this year and to complete the transaction within the first half of next year.

The decision was made after a ministerial meeting held in the morning to approve KDB's decision to sell the shipbuilder to Hanwha, South Korea's seventh-largest conglomerate specialized in defense and energy.

“We have been searching for a buyer with a deep understanding of the business as well as with financial capability, and asked major conglomerates about the takeover plan. It was Hanwha Group who expressed willingness to acquire DSME,” Kang told reporters. “We expect (Hanwha to make) a bold investment in DSME in terms of R&D, which will lead to the overall development of the local shipbuilding industry.”

The KDB sought to sell off DSME earlier this year, but the sale of DSME to its larger rival Hyundai Heavy Industries fell apart as the European Union vetoed the merger of the two Korean shipbuilders, noting that it would result in a 56.6% market domination in liquefied natural gas vessel manufacturing.

Hanwha’s plan of acquiring DSME appears to pose no possibility of a market monopoly, as it has no shipbuilding businesses under its umbrella, Kang added.

This is Hanwha’s second attempt to acquire DSME. In 2008, it bid to purchase DSME for 6 trillion won, but gave up due to opposition from DSME employees as well as financing issues, as the deal was being discussed amid the global financial crisis.

Market insiders said the deal could complete Hanwha's defense business portfolio.

In its latest business restructuring in July, Hanwha placed all of its defense units under its aircraft engines manufacturing affiliate Hanwha Aerospace.

DSME’s business largely involves building special ships such as battleships and submarines, as well as offshore plants such as floating LNG facilities. The group reportedly wanted to purchase DSME's defense unit only, but the KDB wanted to sell the shipbuilder in one piece.

“Through KDB’s scheme to entirely sell the company, instead of selling units in pieces, the M&A deal will complete Hanwha Group’s defense business portfolio ranging over land, sea and air,” said an industry insider.

DSME’s LNG business could also fit into Hanwha's green energy business. Solar panel producer Hanwha Solution is the group's key cash cow.

DSME, one of the country’s top three shipbuilders and the world’s fourth-largest in terms of order backlogs, has been in the sales process since 2001. DSME was spun off from the shipbuilding division of Daewoo Heavy Industries back in 1999, when Daewoo Group faced corporate restructuring in the wake of an International Monetary Fund bailout. DSME was rehabilitated in 2001 through a 2.9 trillion won public fund injection.

DSME shares jumped 13.4% and closed at 24,950 won per share Monday, compared to the previous day, the highest rise in a month period. Hanwha Group stock fell 5.2% to 25,950 won per share.