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Airline acquisition

Seoul court clears way for Korean Air’s $1.6 bn Asiana deal

Dec 01, 2020 (Gmt+09:00)


Korean Air Lines Co. will push ahead with its planned $1.6 billion acquisition of debt-laden Asiana Airlines Inc., the company said, after a Seoul district court removed a key hurdle for the union set to create the world’s seventh-largest carrier.

The Seoul Central District Court on Dec. 1 rejected an injunction filed by a Korean activist fund that threatened the amalgamation of the country’s two flag carriers.

The ruling cleared the way for Korean Air’s parent firm Hanjin KAL Corp. to receive 800 billion won ($723 million) in fresh capital through new share and exchangeable bond sales to its main creditor Korea Development Bank (KDB) this week as planned.

“Hanjin KAL’s planned rights offering (in a third-party placement) is necessary to acquire Asiana Airlines and to achieve the management goal of combining both airlines,” the court ruling reads. “It is difficult to view the new share sale as aimed at defending the incumbent management’s rights  … that is an option that can be chosen at the management’s discretion.”

The activist fund Korea Corporate Government Improvement Fund (KCGI) had filed the injunction to block Hanjin KAL from selling new shares to KDB, arguing the share issues would dilute existing shareholdings and favor family-appointed executives.

After the rights offering, KDB will secure a 10.7% stake in Hanjin KAL, while Hanjin Group Chairman Cho Won-tae and his family shareholders own a combined 36.7% stake in the holding firm. The state-run lender clarified that it will not exercise shareholder rights in favor of the current management, which appeared to have affected the court's decision to throw out the injunction.

KCGI, embroiled in an ongoing feud over the control of the country’s No.1 carrier with Hanjin Chairman Cho Won-tae, has formed a three-party shareholder alliance that includes Chairman Cho’s eldest sister Cho Hyun-ah. Their combined ownership in Hanjin KAL will be diluted to 40.4% after the rights issue this week, from the current 46.7%.

NEVER-ENDING DISPUTE

The court ruling comes after both KDB and the country’s top financial regulator voiced support for the two airlines’ tie-up last week.

“Their dispute over management rights of the Hanjin Group is a never-ending story,” KDB Chairman Lee Dong-gull told The Korea Economic Daily in an interview on Nov. 25.

“We could not wait until their fight was over,” Lee said in reference to KDB’s decision to inject 800 billion won into Korean Air’s parent firm.

Eun Sung-soo, chairman of the Financial Services Commission, stressed during a National Policy Committee meeting on Nov. 27 that there was no alternative to save Asiana Airlines except the proposed merger, as there were no others willing to take on the beleaguered airline.

KDB had approached Korean Air to propose the acquisition of the troubled domestic rival, after HDC Hyundai Development Co., then the preferred buyer, walked away from the $2.2 billion deal to buy Asiana in mid-September, citing contingent debt at the airline reeling from the COVID-19 pandemic.

KDB’s Lee said in the interview that he took lessons from Hanjin Shipping's collapse in 2017, which wrought havoc on the country’s shipping industry.

WHAT’S NEXT?

After receiving 800 billion won from KDB this week, Hanjin KAL will immediately lend the money to Korean Air to finance its purchase of 300 billion won in bonds convertible into Asiana shares this month.

Korean Air will additionally buy 1.5 trillion won in new Asiana shares next year, after raising 2.5 trillion won in a rights offering to secure a 63.9% stake in the country's No. 2 air carrier.

Their combined entity will take more than 70% of the Korean aviation industry’s international passenger routes and cargo lines. That means they will face close scrutiny from the country’s antitrust regulator, the Fair Trade Commission, concerning monopoly regulations.

But as the deal is led by state-run KDB, the antitrust body is highly likely to grant conditional approval for the merger, according to industry watchers.

With KDB's involvement in the proposed deal, Hanjin Chairman Cho will face checks and supervision by the state-run lender. 

“We will do our best to play a role of supervisor of the combined carrier to help the combined flag carrier achieve ethical management high enough to meet fellow citizens’ expectations,” KDB said in a statement, in response to the court decision.

The remaining stumbling block would be strong opposition from both airlines' labor unions over concerns about massive job cuts.

"We will reflect on the labor unions' views regarding job security by holding negotiations in the middle of the merger process," a KDB source told The Korea Economic Daily. 

Write to Jeong-Min Nam and Kyung-Min Kang at peux@hankyung.com

Yeonhee Kim edited this article.

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