HMM Big Wave Passed... "Focus on Shipping Alliance Reorganization with 1 Year Left"

As the HMM acquisition battle officially begins, the HMM headquarters located in Yeouido Park One Tower. Photo by Jo Yongjun jun21@

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The sale of HMM ultimately fell through. Since it is expected to take considerable time to pursue a resale, from HMM's perspective, this temporarily alleviates uncertainty. During this period, attention should be paid to the anticipated changes in the global shipping industry landscape and the reorganization of shipping alliances expected early next year, and measures to respond to these developments need to be prepared.

On the 7th, KDB Industrial Bank and the Korea Ocean Business Corporation announced, "We engaged in sincere negotiations for seven weeks with the consortium of Harim Group's Pan Ocean and JKL, but the talks ultimately broke down due to disagreements on certain issues." Although the negotiation deadline was extended once from the original closing date of the 23rd of last month to the 6th of this month, the sale was ultimately canceled.

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The Harim side had requested that the conversion of the remaining perpetual bonds held by the Industrial Bank and the Korea Ocean Business Corporation into shares be postponed for three years. If converted, Harim's stake would drop from 57.9% to 38.9%, reducing the dividends they would receive. Although Harim conceded on this point at the last minute, the agreement still fell through. This was because Harim's request to exempt the private equity fund JKL Partners, which participated as a financial investor (FI), from the 'five-year shareholding condition' after acquisition was ultimately rejected. The Industrial Bank proposed a mediation plan to reduce this period to three years, but the Korea Ocean Business Corporation refused, leading to the breakdown.

The Industrial Bank's calculations also became complicated. Their plan to sell HMM shares when the stock price rose to secure cash and improve the Bank for International Settlements (BIS) capital adequacy ratio to ease financial soundness burdens was thwarted. The BIS ratio is an indicator used to assess a bank's financial health. Earlier, Kang Seok-hoon, chairman of the Industrial Bank, emphasized the importance of selling HMM shares at a meeting in June last year, stating, "If HMM's stock price moves by 1,000 won, the Industrial Bank's BIS ratio moves by 0.07 percentage points."

With the sale falling through, it is analyzed that short-term uncertainty for HMM has been resolved. Concerns that HMM's cash reserves would be used for the acquisition have been dispelled, and the risk of labor union strikes has also diminished. Previously, the HMM labor union stated, "The reserves that should be used for the development of the shipping industry must not be left to be used for Harim Group's acquisition financing interest and debt repayment," even threatening to strike.

HMM is expected to focus on the most urgent task for the time being: the reorganization of the 'shipping alliances.' Shipping alliances are agreements among carriers that regularly operate specific routes to prevent excessive competition by coordinating freight rates and transportation conditions. Currently, three alliances dominate the market. The largest is '2M,' which includes MSC (Switzerland), ranked first in capacity, and Maersk (Denmark), ranked second. Following are the 'Ocean Alliance,' consisting of CMA CGM (France), COSCO (China), and Evergreen (Taiwan), ranked third, fourth, and sixth respectively, and 'THE Alliance,' which includes Hapag-Lloyd (fifth), ONE (Japan, seventh), HMM (eighth), and Yang Ming (Taiwan, ninth), dividing the market among them.

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However, recently Maersk and Hapag-Lloyd announced that they will form a new alliance called the 'Gemini Cooperation' starting February next year, making a large-scale tectonic shift inevitable. With Hapag-Lloyd, the largest member of 'THE Alliance,' leaving, the competitiveness of the alliance to which HMM belongs will sharply decline. An industry insider explained, "Although HMM's market share of 2.7% is not high, it cannot be considered negligible either, so it should be leveraged to exert negotiating power." They added, "Since environmental regulations require investment in eco-friendly transitions, the fact that Harim, which had uncertain investment capacity after acquisition, did not acquire HMM could actually be a positive factor."

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