Hankook Tire to sell stake in Hanon Systems, eyes $900 mn gains

South Korea’s Hankook Tire & Technology Co. plans to divest of its 19.5% stake in Hanon Systems Corp., an auto parts maker, in a move that is expected to bring about a return of more than 1 trillion won ($896 million) from its six-year investment.

According to investment banking sources on Apr. 8, Hankook Tire, the country’s largest tire maker, has decided to sell its stake alongside the 50.5% stake up for sale by Hanon’s largest shareholder Hahn & Co.

The decision comes as a surprise because the market was counting Hankook Tire as one of the most likely candidates to acquire Hanon in a bid to further strengthen its position in the Korean auto components market.

Last month, sources said Hahn & Co., a Korean private equity investment group, is seeking to sell up to 70% of Hanon to exit from its investment and book gains. Morgan Stanley is the lead manager of the stake sale.

Hahn & Co. and Hankook Tire bought their combined 70% stake from Visteon Corp., a US automotive electronics supplier, for 3.8 trillion won in 2014. Their ownership was divided into 50.5% by Hahn & Co. for 2.8 trillion won, and 19.5% by Hankook Tire for 1 trillion won.

The combined 70% stake up for sale is estimated at 8 trillion-10 trillion won, including management premium. If a deal is reached at the higher end of the estimated value, that would mark the country’s largest acquisition transaction.

TAG-ALONG RIGHT VS FIRST REFUSAL

When Hankook Tire joined Hahn & Co. bought the stake back in 2014, the tire maker was given the tag-along right, also known as the “co-sale right,” meaning both companies can re-sell the purchased stake simultaneously.

Hankook Tire was also given the right of first refusal (ROFR), a contractual right that gives its holder the option to buy the shares of the entity before the owner is entitled to enter into a transaction with a third party.

Industry watchers said there are a few reasons for Hankook Tire’s decision not to exercise its priority right to buy more stakes and, instead, sell out of its existing shares in Hanon Systems.

Cho Hyun-bum, chief executive of Hankook Tire, said in 2014 that the company was buying into the stake to become its second-largest shareholder to expand its business scope beyond tire making.

But now, he may find it hard to aggressively pursue an M&A given that the company has only 1 trillion won in cash and cash equivalents, not enough for the acquisition of Hanon. The CEO is also known to be involved in a management feud with his brother, Cho Hyun-sik, currently vice chairman of the tire maker’s holding firm, Hankook & Company.

Analysts said Hankook Tire’s decision to pull out of Hanon also reflects its bid to improve relations with its largest client, the Hyundai Motor Group, which also has auto parts subsidiaries.

The automotive group’s two units – Hyundai Motor Co. and Kia Corp. – account for some 40% of Hankook Tire’s total sales. Sources said the tire maker’s bid to become larger through the M&A may estrange it from Hyundai Motor Group.

POTENTIAL BIDDERS

Hanon Systems, formerly Halla Visteon Climate Control Corp., is mainly engaged in the manufacturing and sale of automotive thermal management systems and automotive parts, including air conditioners, heaters, cooling modules and compressors. Among its major clients are Volkswagen AG, Tesla Inc. as well as Hyundai Motor Group.

The growing electric vehicle market is expected to increase demand for Hanon's battery thermal management systems, including battery chillers, used to maintain optimum battery temperatures.

Analysts said potential bidders for Hanon include LG Electronics Inc., which is actively venturing into the auto parts industry.

LG launched a vehicle component solutions business in 2013 and acquired Austria-based premium lighting systems maker ZKW in 2018. Last year, LG signed a deal with Canadian auto parts maker Magna International Inc. to launch a $1 billion joint venture to manufacture EV components.

Volkswagen, which plans to make batteries for its electric cars in-house, may also be interested in Hanon, according to industry officials.

Korea’s Halla Group and global private equity firms could also be interested in Hanon, they said.

Write to Jun-ho Cha at chacha@hankyung.com
In-Soo Nam edited this article.