No Deal with Asiana Approaching... Numerous Challenges Including Deposit and Restructuring

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[Asia Economy Reporter Yoo Je-hoon] The merger and acquisition (M&A) of Asiana Airlines, which has proceeded like a rollercoaster over the past year, is on the verge of a 'no deal.' While the industry sees that the uncertainty over whether HDC Hyundai Development Company will acquire the airline has been lifted, challenges such as legal battles over the 250 billion KRW performance bond and restructuring for business normalization remain.

According to the business community on the 7th, the creditors and Kumho Industrial are expected to officially announce the termination of the Asiana Airlines stock purchase agreement (SPA) with the HDC Hyundai Development-Mirae Asset Daewoo consortium as early as this week. This follows the fruitless face-to-face negotiations last month between Lee Dong-gul, chairman of KDB Industrial Bank, and Chung Mong-gyu, chairman of the HDC Group.

If the no deal is formalized, the uncertainty surrounding Asiana Airlines over the past year is expected to be resolved for the time being. Based on the 'Plan B' prepared by the creditors, managing Asiana Airlines, going through business normalization, and then reselling it after the COVID-19 pandemic are being strongly considered.

However, the general view is that many challenges remain for Asiana Airlines despite the resolution of uncertainty. First, the issue of the performance bond related to the failed M&A may come to the forefront. There is a dominant expectation within and outside the business community that HDC Hyundai Development will file a lawsuit to reclaim the 250 billion KRW performance bond following the no deal declaration.

There is a clear precedent. In 2008, Hanwha Group paid a 315 billion KRW performance bond to KDB Industrial Bank when attempting to acquire Daewoo Shipbuilding & Marine Engineering, but the M&A was ultimately canceled due to the global financial crisis that year. Hanwha Group filed a lawsuit to reclaim the performance bond and, after about eight years of legal battles, recovered approximately 62%, or 195.1 billion KRW.

This case is also relevant to HDC Hyundai Development's Asiana Airlines M&A, which took place after the signing of the memorandum of understanding (MOU) and the outbreak of COVID-19. A business insider said, "Even though rumors circulated that Chairman Chung and HDC Hyundai Development had effectively given up on the acquisition since April, negotiations continued, likely with the performance bond refund in mind," adding, "It is highly likely they will cite COVID-19 and non-cooperation during due diligence as issues."

In this case, Kumho Asiana Group's plan to rebuild the group using the Asiana Airlines sale proceeds (322.8 billion KRW) will also face setbacks. KDB Industrial Bank, which has effectively led this M&A, could find itself in a difficult position.

However, unlike the Daewoo Shipbuilding & Marine Engineering M&A, there is a difference in that the SPA main contract and due diligence were conducted in the Asiana Airlines M&A, so a one-sided outcome may not emerge. Chairman Lee also stated at a press conference early last month, "All responsibility for the contract failure lies with HDC Hyundai Development," and added, "Since the responsible party should bear the responsibility, I expect there will be no lawsuit for the return of the deposit."

In fact, during the Daewoo Shipbuilding & Marine Engineering M&A, Hanwha Group tried to conduct a 3-4 week detailed due diligence with a due diligence team, but the labor union's strong resistance prevented even the due diligence from proceeding, and the deal was terminated. This differs somewhat from the Asiana Airlines case, where both the main SPA contract and due diligence were completed. The industry believes that HDC Hyundai Development's continuous mention of non-cooperation during due diligence and the need for re-due diligence to the creditors and Kumho Industrial reflects this awareness.

Professor Hwang Yong-sik of the Department of Business Administration at Sejong University said, "The 2008 Daewoo Shipbuilding & Marine Engineering case was the first in Korean M&A history where the party terminating the contract was able to recover part of the performance bond," adding, "Creditors such as KDB Industrial Bank would have designed SPA clauses to avoid such a precedent, and especially since the due diligence team was stationed at the headquarters during this Asiana Airlines M&A, the outcome will not be easy."

The direction of restructuring under creditor management is also uncertain. While there are speculations within and outside the industry that the creditors may attempt large-scale workforce restructuring after business normalization and either separate sale or liquidation of Asiana Airlines and its low-cost carrier (LCC) subsidiaries Air Busan and Air Seoul, there is also considerable analysis that diversification of the business model is necessary given the characteristics of the airline industry.

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