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Airlines

Korean Air to buy rival Asiana in $1.6 bn deal to emerge as world’s 7th airline

Nov 16, 2020 (Gmt+09:00)

Korean Air and Asiana Airlines' planes grounded at Incheon Int.'l Airport.

Korean Air Lines Co. will spend 1.8 trillion won ($1.6 billion) to own a majority stake in beleaguered local rival Asiana Airlines Inc., in a deal that will catapult it to become the world’s seventh-largest airline.

South Korea’s largest full-service carrier said on Nov. 16 that it plans to complete the acquisition by the end of the first half of 2021 and launch the merged entity in 2022.

Under the proposed deal, Korean Air will buy 1.5 trillion won in new shares to be issued by Asiana and 300 billion won worth of perpetual bonds in the country’s second-largest carrier.

The acquisition plan was confirmed on Monday at a meeting of related ministries, including the state-run Korean Development Bank (KDB), the main creditor of both airlines.

“The merger of the two airlines will be the first step toward the much-needed restructuring of the local aviation industry, which is reeling from the global COVID-19 pandemic,” KDB Chairman Lee Dong-gull said in a statement.

With the deal, the integrated flag carrier will be able to tide over the current crisis posed by the pandemic, he said.

Korean Air and its parent, Hanjin KAL Corp., also approved the takeover plan at their respective board meetings earlier Monday.

“There will be no discrimination or differences in work environment after combining the two companies,” Hanjin Group Chairman Cho Won-tae said in a statement.

The announcement follows several local media reports last week that Hanjin Group is in talks with KDB to take over financially strapped Asiana.

KDB TO USE TAXPAYER MONEY TO RESCUE AIR INDUSTRY

To facilitate the deal, the state-run policy bank will inject 800 billion won in taxpayer money into Hanjin KAL through a third-party share placement and exchangeable bond purchases. After the stock purchase, the KDB will own 9.7% of Hanjin KAL to become its third-largest shareholder.

Hanjin KAL will then lend the money to Korean Air.

Separately, Korean Air will issue new shares worth 2.5 trillion won in a rights offer by mid-March to help finance the takeover. Hanjn KAL will also participate in the rights offering.

Of the raised funds, 1.8 trillion won will be used to buy Asiana by the end of June 2021. Once the transactions are completed, Korean Air will own 63.9% of Asiana as its largest shareholder.

Graphics by Jerry Lee

The announcement comes about two months after KDB’s bid to sell indebted Asiana to HDC Hyundai Development Co. collapsed. Then-preferred buyer HDC walked away from the deal in mid-September, citing contingent debt at Asiana amid the pandemic.

STREAMLINING OF AFFILIATED BUDGET CARRIERS

The merger of the two airlines is expected to further enhance the competitiveness of the Korean aviation industry with more streamlined route operations and lower costs.

“Considering that our financial status could also be endangered if the COVID-19 situation is prolonged, it is inevitable to restructure the domestic aviation market to enhance its competitiveness and minimize the injection of public funds,” Korean Air said in a statement.

After bringing the smaller rival under its wing, Korean Air is expected to adjust overlapping international routes and combine the two firms’ maintenance, repair and overhaul divisions in order to cut costs.

The buyer will also gradually integrate three low-cost carriers – Korean Air’s Jin Air Co. alongside Asiana’s Air Busan Co. and Air Seoul Inc. – in a broader acquisition plan.

The KDB and industry officials said Jin Air will absorb the aircraft and routes run by Air Busan and Air Seoul, becoming one of the largest budget carriers in Asia following the market leader, Malaysia’s AirAsia.

In the Korean market, the merged budget carrier will own a combined 59 airplanes, followed by Jeju Air’s 45 jets and T’way Air’s 28 jets.

ANTITRUST SCRUNITY OVER MONOPOLOY

Korean Air’s acquisition of Asiana will undoubtedly face close scrutiny from the country’s antitrust regulator, the Fair Trade Commission, especially with regards to monopoly regulations.

A combined entity will take more than 70% of the Korean aviation industry’s international passenger routes and cargo lines.

The transport ministry said in a media briefing on Monday that the government will ensure there is no interference by Korean Air’s owner members in the management of the merged company.

Graphics by Jerry Lee

POTENTIAL JOB CUTS, ACTIVIST OPPOSITION

The merger will also likely face objections by the unionized workers of the two carriers on concerns over massive job cuts and some activist shareholders who fear the acquisition of Asiana will consolidate Korean Air’s incumbent management.

Korean Air’s move to acquire Asiana comes amid an ongoing feud over the control of the country’s No.1 carrier between Hanjin Chairman Cho Won-tae and a three-party shareholder alliance led by activist fund Korea Corporate Government Improvement Fund (KCGI) and Cho’s elder sister, Cho Hyun-ah.

The KCGI, a major shareholder of Hanjin KAL, has already expressed opposition to the merger, saying that a KDB investment will likely support current management. The activist fund favors replacing family-appointed executives with outsiders.

SHARES RISE

Shares of Asian finished up by the daily limit of 30% at 5,570 won on Monday on expectations of the takeover by Korean Air.

Hanjin Group shares also performed well on investor expectations that the creation of a mega airline will help the group overcome the pandemic-caused industry downturn.

Korean Air closed up 12.5% at 26,950 won. Hanjin KAL ended 5.7% higher at 82,200 won.

Write to Kyung-Min Kang and Man-Su Choe at Kkm1026@hankyung.com

In-Soo Nam edited this article.

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