Ocean carrier HMM's share price gains put KDB in hot seat

On Nov. 20, HMM Co., South Korea’s No. 1 ocean carrier, issued new 200 million shares after its two largest shareholders -- Korea Development Bank (KDB) and Korea Ocean Business Corp. -- converted 1 trillion won worth of their perpetual bonds into HMM equities.

The new shares raised the two state-run institutions' stake in HMM from 40.9% to 57.9%, set to be sold to a consortium of Harim and JKL Partners. It also boosted its market capitalization to 11 trillion won ($8.5 billion) from 8.0 trillion won.

Contrary to the traditional market theory, the bond-to-equity conversion seemed not to deliver a shock to investors. Its share price has remained firm in the month or so since the new share issuance.

The steady share price might have taken the pressure off KDB.

Based on HMM’s share performance over the past few months, the state-run lender determined the value of the sea flag carrier, formerly Hyundai Merchant Marine, as stipulated by the law.

According to Article 43 of the Enforcement Decree of the National Property Act, the price of listed securities is set by the weighted average of stock prices over the past 30 days.

Early this month, KDB chose Harim Co., a leading poultry processor, as the preferred buyer of HMM. Harim offered 6.4 trillion won for a 57.9% stake in HMM held by creditors.

Since Harim was named as the final bidder, HMM’s share price has spiked to its strongest point in eight months and above both KDB’s estimate and Harim’s bid price.

Its share price got support after the Houthis, an armed group from a minority sect from Yemen, attacked Red Sea ships. Investors bet HMM would be able to raise its market share amid the conflict on the Red Sea, which could disrupt the global logistics system.

Ironically, HMM’s strong stock performance put KDB in the hot seat. 

HMM’s value assessment, based only on its share price, led it to reject a bid from Dongwon Group, one of the two strong candidates, because of its lower bid.

In the absence of a runner-up, KDB might have little room to maneuver in negotiations with Harim, while not raising the price tag.

“A failure for both sides to reach a definitive agreement means a collapse of the deal (to sell HMM). So a huge burden is on the sell side,” said an investment banking official.

Last week, KDB held a kick-off meeting with Harim to discuss the terms of the HMM sale.

The HMM’s case might serve as a good example of how the law could hinder government efforts to recover as much taxpayer money as possible from the sale of nationalized assets.

Although not stipulated by the law, state-run institutions are allowed to apply other valuation tools to state assets up for sale in consultation with outside institutions, which conduct due diligence.

However, applying such valuation methods could stir controversy and hold some officials involved in the sale accountable for failing to set a fair value on a state asset.

In that regard, it would be understandable if KDB takes a defensive stance by sticking to the law on HMM's value assessment.

To allow more flexibility for the sale of nationalized assets, the law needed to be amended on asset valuation standards.

Now that HMM’s share price has seen a strong rebound, should KDB cancel the deal with Harim not to sell it below the market price? Or should KDB be reprimanded for proceeding with the HMM sale, not waiting to extract better terms?

(Corrected on Jan. 23: The new shares issued in November raised Korea Development Bank and Korea Ocean Business' stake in HMM from 40.9% to 57.9%, not represent 40.7% of HMM's outstanding shares.)

Write to Jong-Kwan Park at pjk@hankyung.com
 

Yeonhee Kim edited this article.