Hanwha Acquires Daewoo Shipbuilding & Marine Engineering... How Will the Final Negotiation Go?

Hanwha-San-eun Daewoo Shipbuilding & Marine Engineering Main Contract Key Points

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] Hanwha Group's due diligence for the acquisition of Daewoo Shipbuilding & Marine Engineering (DSME) has been completed, and the signing of the main contract is imminent. The hardships endured over 21 years to find an owner are about to come to an end. For Hanwha Group, this moment marks the conclusion of a 12-year reattempt at acquisition and the beginning of a new era.

Although the main contract is in the final countdown, much remains uncertain. Final purchase price determination, financing methods, potential replacement of the current management team, and employment succession are among the last-minute variables.

According to industry sources on the 15th, if the remaining procedures proceed smoothly, the acquisition of DSME is expected to be completed in the first half of next year. After signing the new share subscription agreement between KDB Industrial Bank and Hanwha Group, all approval processes including corporate merger and defense company acquisition approvals must be passed. The deadline for signing the main contract is the 19th, but an extension is possible. The two-month due diligence revealed no unusual contingent liabilities.

The financial condition remains burdensome. As of the end of the third quarter on a consolidated basis, DSME's debt ratio stands at 1291%, and the cumulative deficit up to the third quarter amounts to 1.1974 trillion KRW. Short-term borrowings maturing within one year also reach 1.4 trillion KRW. The industry expects additional financial support to be inevitable even after the acquisition.

This situation is expected to influence the final purchase price. In September, Hanwha signed a conditional investment agreement (MOU) to participate in a 2 trillion KRW capital increase of DSME, acquiring a 49.3% stake in management rights, but valuation remains a variable.

DSME's market capitalization was 2.08 trillion KRW as of the closing price on the 14th, down about 25% from 2.7 trillion KRW when the MOU was signed in September. Hanwha, acquiring half of the shares, is in a position to pay over 1 trillion KRW as a management premium.

Within Hanwha, voices have begun to emerge that 1 trillion KRW is too much. Although the shipbuilding industry has improved since the end of last year, considering the poor financial condition, Hanwha may request adjustments to the final purchase price. Negotiations on the purchase price could be prolonged ahead of the main contract signing.

[Image source=Yonhap News]

Hanwha Group's financing plan remains a puzzle. Hanwha plans to secure 2 trillion KRW through Hanwha Aerospace (1 trillion KRW), Hanwha Systems (500 billion KRW), Hanwha Impact Partners (400 billion KRW), and three subsidiaries of Hanwha Energy (100 billion KRW).

Hanwha Aerospace stated during its third-quarter earnings conference call that "there is no change from the previous position that raising 1 trillion KRW is fully possible internally." The plan is to secure acquisition funds through increased cash assets and export advances following the merger with Hanwha Defense.

On the other hand, the corporate merger review that blocked Hyundai Heavy Industries Group's acquisition of DSME earlier this year is not expected to be a major variable. At that time, the EU (European Union) denied the merger citing LNG carrier monopoly concerns. Since Hanwha does not have a shipbuilding business, it is expected to pass the review smoothly.

Attention is also focused on whether the current management will be replaced. Park Doo-sun, a ‘Daewoo Shipbuilding man’ who joined DSME in 1986, is at the center. Although Park faced political attacks when appointed CEO earlier this year, he is reportedly highly trusted within the company. There is also speculation that Hanwha Group, which values ‘trust and loyalty,’ is unlikely to undertake a full-scale management replacement immediately after the acquisition.

This content was produced with the assistance of AI translation services.