Hanwha agrees to buy Daewoo Shipbuilding for $1.4 billion

South Korea's leading weapons manufacturer Hanwha Group agreed on Monday to buy a controlling stake in Daewoo Shipbuilding & Marine Engineering Co. (DSME) for 2 trillion won ($1.4 billion), with which the group expects to create synergy with its strategic businesses. 

Hanwha will purchase new shares to be issued by the world's No. 2 shipbuilder, instead of buying its existing shares, according to regulatory filings by both Hanwha Group units and DSME.

The Korea Development Bank (KDB), with a 55.7% stake in DSME, has been looking for a domestic buyer. Its latest attempt to sell the shipbuilder to its bigger rival Hyundai Heavy Industries Group faltered due to opposition from the European Commission in January.

Under the memorandum of understanding signed on Monday, Hanwha will acquire a 49.3% stake and managerial control of DSME following the rights offering.

If the deal is finalized, the state-run bank, KDB, which is DSME's main creditor, will hold a 28.2% stake in the shipbuilder, down from 55.7%.

Back in 2008, Hanwha came close to buying debt-ridden DSME for more than 6 trillion won but backed down in the wake of the global financial crisis.

Hanwha, the country's No. 7 conglomerate, is understood to have entered into talks with KDB over DSME last month. The state-run bank's board of directors gave the deal the go-ahead on Monday.

KDB has been controlling DSME since its parent Daewoo Group collapsed in 1998.

Most of the proceeds from the new issues will be used to shore up DSME's operations, according to sources familiar with the situation.

Last year, DSME swung to a net loss of 1.8 trillion won from 87 billion won in net profit a year earlier. In the first half of this year, the shipbuilder posted 668 billion won in net losses.

The company’s debt-equity ratio ballooned to 676.5% as of the second quarter of this year from about 200% in 2019.

POSSIBLE DISPUTE OVER PRICE TAG

Industry watchers said the state-run bank may face criticism over DSME’s price tag of 2 trillion won.

Asked by reporters at a media briefing if the sale to Hanwha could be a bargain and a favor for the defense conglomerate, KDB Chairman Kang Seog-hoon said: “If the sale to Hanwha proceeds as planned, that is the best way to minimize losses and save taxpayers’ money.”

DSME’s value was about 6.7 trillion won in 2008 but rapidly shrank to 1.6 trillion won when it was pushed to merge with Hyundai Heavy Industries in 2019.

“At this point, a speedy sale of the company could be more important than endlessly waiting for a new buyer to offer a higher price,” he said.

SYNERGY EFFECT

Hanwha is building its presence in the arms manufacturing sector, led by ammunition and arms manufacturer Hanwha Defense Co. Recently, the company has signed contracts to export its K9 self-propelled howitzers to Australia and Poland.

Its acquisition of DSME would expand its defense-related business into warships and submarines.

DSME is the world’s largest warship and submarine builder. It also boasts sophisticated shipbuilding technologies for special vessels. For those reasons, the South Korean government has been reluctant to sell it to a foreign buyer.

Six Hanwha Group units, including Hanwha Aerospace, Hanwha Systems Co. and Hanwha Energy Corp., will split their ownership of DSME. Hanwha Aerospace, an aircraft engine producer, will take half of the new shares.

Meanwhile, howitzer producer Hanwha Defense is not participating in the consortium. 

The shares will be issued at 19,150 won apiece, or a 13% discount to Friday's close of 22,000 won.

On Monday, the stock jumped to its highest close in nearly five months on news of the Hanwha-DSME deal. It spiked 13.41% to end at 24,950 won.

The transaction has yet to be finalized, though. After selecting Hanwha as a preferred buyer, KDB will leave the door open to a possible higher bid.

But sources said that the stalking horse bid method is a mere formality to demonstrate KDB's efforts to sell DSME at a proper price.

(Updated with the KDB chairman’s comment, DSME’s debt ratio and the size of its stake after a planned rights offering)

Write to Kyung-Min Kang, Ik-Hwan Kim and In-Hyeok Lee at kkm1026@hankyung.com
Yeonhee Kim and In-Soo Nam edited this article.