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KDB mulls sale of HMM to POSCO

Jan 27, 2021 (Gmt+09:00)

HMM Algeciras is the world's largest container ship with a capacity of 24,000 TEU.

South Korea's state-run bank is considering selling HMM Co., the country's largest container line, to steelmaker POSCO as the shipping industry experiences its biggest boom in a decade, making it an opportune time to privatize the shipping company.

"The Korea Development Bank (KDB) recently notified the Ministry of Economy and Finance of its intentions to sell HMM," said a government official on Jan. 27. "The ministry will begin reviewing the measures with the relevant parties."

The decision is supported by KDB Chairman Lee Dong-gull's view that companies under the state-run bank should be privatized as soon as possible to boost the competitiveness of the country's key industries.

HMM, formerly known as Hyundai Merchant Marine, is expected to be priced between 1 trillion won and 1.5 trillion won ($1.4 billion), including the premium for management control.

According to government sources, KDB chose POSCO as the optimal candidate and is currently holding discussions under the table. The Korean steelmaker has shown intent to tap into the shipping industry for some time, as it planned to set up a logistics affiliate last year, although the plan was scrapped.

However, both parties have declined to make an official comment.

"Nothing specific has been determined," said a KDB official, while POSCO said that the state-run bank has not yet put forward a formal offer.

The privatization of HMM has been a long-held desire for KDB, which carried out a tough restructuring of the company after becoming its biggest shareholder in October 2016. KDB holds a 12.61% stake in HMM. 

"KDB determined that now is the time to sell HMM, so it is free to secure market competitiveness instead of being kept under creditor control," said the government official.

Since 2016, over 3 trillion won ($2.7 billion) worth of tax money has been injected into the container carrier, which failed to show much improvement. By 2019, the company had racked up a total 2.9 trillion won in operating losses.

Meanwhile, KDB continued to tighten its grip over HMM. In November 2018, KDB Chairman Lee publicly rebuked HMM during a media roundtable, saying that moral hazard is evident in the company and pledging that indolent executives and employees would be weeded out. 

The intense restructuring efforts paid off in the wake of the pandemic. The recovering shipping industry, alongside the government's timely orders of large container vessels and KDB's efforts to rebuild the shipping sector, have helped HMM swing to profit for the first time in 21 quarters.

Market watchers estimate HMM reached around 800 billion won ($724 million) in operating profit last year.

WORLD'S FIFTH-LARGEST STEELMAKER EYES SHIPPING INDUSTRY

The Korean steelmaker has been keen to enter the shipping industry in efforts to reduce expenses by improving logistics efficiency.

POSCO ships around 160 million tons of steel raw materials and products annually. Its trading arm POSCO International also brings in millions of tons of goods yearly, and secondary battery materials maker POSCO Chemical has seen an increase in imports of materials, notably anodes and cathodes.

The steelmaker group's yearly costs for logistics are estimated to stand around 10% of its total revenue, reaching 6 trillion won ($5.4 billion) last year. If POSCO ventures into the shipping industry, the group would be able to save billions of dollars annually by consolidating its logistics operations, currently split up among affiliates.

Market watchers say POSCO, with its deep pockets, will create synergy in various areas if it acquires HMM. The company has the financial capacity to cover the deal as its cash and cash equivalent assets neared 6.8 trillion won ($6.2 billion) as of the third quarter last year. 

In addition to curbing logistics costs, POSCO's acquisition of HMM would help improve the container carrier's global competitiveness.

The shipping industry is facing fierce competition over supersized vessels. Since the fourth quarter of last year, there have been orders placed globally for around 30 Ultra Large Container Ships (ULCS) with a capacity of over 20,000 twenty-foot equivalent units (TEU).

"HMM needs to achieve economies of scale while increasing cargo capacity. In that case, POSCO may be the right fit to carry out aggressive investments into the shipping industry," the government official said.


Write to Man-su Choe and Kyung-min Kang at bepop@hankyung.com

Danbee Lee edited this article.

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