LX Group may bid for container line HMM in four-way race

South Korea’s logistics-to-trading conglomerate LX Group is expected to join the race for the country’s No. 1 shipping company HMM Co. in a deal worth an estimated 6 trillion won ($4.5 billion), according to people with knowledge of the matter on Friday.

LX Group received the information memorandum on HMM from its sale manager Samsung Securities Co. earlier this week. It recently hired an advisor to study its bid for the container line.

It may compete with three other medium-sized domestic companies: processed meat producer Harim Co., seafood company Dongwon Industries Co. and smaller shipping company SM Group.

The stake up for grabs is 40.65% of HMM. But it could swell to 58% if Korea Development Bank (KDB) and Korea Ocean Business Co. (KOBC) convert their 1 trillion won worth of permanent HMM bonds into shares.

KDB is a state-run lender and KOBC is a state-owned ship finance institution.

LX Group had initially hesitated to participate in the competition given concerns over the financial burden it could bear to acquire HMM.

But it recently changed its stance, determing that HMM would create synergy with its flagship and logistics company LX Pantos Co.

LX Group could use HMM’s container ships at lower rates than its rivals, and grow into a full-fledged logistics company with both land and sea transportation operations.

Global Sae-A Co., speculated to be a bidder, has decided not to participate.

Germany’s largest shipping company Hapag-Lloyd AG recently received the IM of HMM. But the consensus view among investment bankers is that South Korea will unlikely sell the country’s only shipping company, left up for grabs, to a foreign competitor.

Samsung Securities will receive preliminary bids by Aug. 21.

Harim has joined hands with JKL Partners, a Seoul-based private equity firm and is looking to secure loans from Woori Bank, Kookmin Bank and other lenders.

It is said to be securitizing its real estate assets in Seoul, valued at more than 1 trillion won, to raise money if needed.

Dongwon is said to discuss forming a lender group led by Hana Bank.

Now market eyes are on whether LG Group will sponsor the deal. LX Group was spun off from the country’s No. 4 group in 2021.

SMALLER ASSETS

While the sale process has kicked off, some industry observers are skeptical about the planned sale of HMM.

The potential bidders are much smaller than their acquisition target in terms of assets.

The assets of Harim, SM Group, LX Group and Dongwon stand at 17 trillion won, 16 trillion won, 11 trillion won and 9 trillion won, respectively. That compared with HMM’s 24 trillion won.

The cash and cash equivalents of LX, Harim, SM and Dongwon amount to 2.4 trillion won, 1.5 trillion won, 1 trillion won and 600 billion won.

Given that the deal size could shoot up to 6 trillion won, including a management premium, they may need to raise a substantial amount of money from outside investors.

But their funding conditions are tough due to the shipping company slump and higher borrowing costs.

They are seeking to raise acquisition financing at interest rates in the mid to high end of the 8% range, the sources said.

This means they could spend more than 300 billion won servicing the loans of some 4 trillion won for the HMM deal.

LEVERAGED BUYOUT

Industry observers also warn that the bidders may pursue a leveraged buyout, borrowing money backed by HMM assets.

The loans could be paid back through dividends from HMM.

The container line sits on 12.3 trillion won of cash and cash equivalents as of the end of June.

To prevent such a scenario, market talk is that the sell side is preparing to attach conditions to the deal so that its buyer would not be allowed to sharply lift HMM’s dividend in the first few years after its purchase.

Alternatively, KDB and KOBC may not offer their holdings of 1 trillion won worth of HMM’s convertible bonds for sale. They may later convert them into shares to contain any move by its new buyer against the interests of HMM.

If the sale collapses, KDB could turn to a stalking horse sale process to extract better terms, the sources added.

Write to Jong-Kwan Park and Jun-Ho Cha at pjk@hankyung.com
 

Yeonhee Kim edited this article.