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Delayed EU approval puts Hyundai-Daewoo shipbuilding deal at risk

Hyundai mulls selling part of LNG business of Hyundai Mipo or Hyundai Samho to address monopoly concerns

By Oct 03, 2021 (Gmt+09:00)

Delayed EU approval puts Hyundai-Daewoo shipbuilding deal at risk

The deal to combine the world's largest shipbuilder Hyundai Heavy Industries Co. with second-ranked Daewoo Shipbuilding & Marine Engineering Co. is facing greater uncertainty as the merger was again delayed, awaiting much-needed approval from the European Union, Japan and South Korea. 

Hyundai Heavy on Sept. 30 postponed the acquisition of Daewoo by three months to the end of December in its fourth delay to close the deal, according to a regulatory filing by Hyundai's holding company Korea Shipbuilding & Offshore Engineering Co. 

Hyundai in 2019 signed an agreement to acquire a 55.7% stake in Daewoo Shipbuilding from the state-run Korea Development Bank (KDB) for 2 trillion won ($1.7 billion), alongside a pledge to inject 1.5 trillion won into Daewoo to buy the latter’s new shares.

The continued delay stoked speculation that the deal might collapse, unless Hyundai accepts the EU's demand of selling part of the liquefied natural gas (LNG) carrier business of either Hyundai or Daewoo by year's end, as a condition of its approval of the merger.

Hyundai has not made an official response to the EU's demand, announced in June 2020 as part of the interim results of its review of the merger. But sources of the South Korean shipbuilder said it would be difficult to follow the requirements, which would reduce the benefits of its Daewoo Shipbuilding acquisition.

But it is considering selling part of the LNG ship business of its shipbuilding subsidiaries -- Hyundai Mipo Dockyard Co. and Hyundai Samho Heavy Industries Co. -- to address the EU's concerns over its increased market presence.

Delayed EU approval puts Hyundai-Daewoo shipbuilding deal at risk

Their combination already received the green light from Singapore, Kazakhstan and China by the end of last year. 

The EU has postponed the scrutiny of the two Korean shipbuilders' merger three times, citing difficulties of conducting onsite studies of their facilities due to the COVID-19 pandemic. EU has not yet given a clear timeline for the review. Getting EU approval is crucial because it is highly likely to clear the way for other countries to follow suit. 

A combined entity of Hyundai Heavy and Daewoo will likely control over 60% of the world's LNG ship market, which the EU said could lead to price hikes of vessels.

To allay the concerns, Hyundai Heavy had suggested it would freeze LNG ship prices over the next few years and transfer its technology to other shipbuilders to lower the industry's entry barriers.

But the EU called on Hyundai to come up with other measures, which might involve the sale of its assets, including LNG terminals, according to the industry sources.

Shipbuilding industry watchers say the EU has been sitting on the review to push Hyundai to satisfy its requirements, or grant approval on the condition of Hyundai selling part of its LNG business.

"Winning EU approval will depend on what additional measures Hyundai Heavy will come up with in regards to its asset sale," said one of the industry sources.

With the shipbuilding industry making a strong post-pandemic recovery, Daewoo Shipbuilding's labor union and company officials voiced confidence about remaining a standalone entity, which KDB's Chairman Lee Dong-gull doubted.

Last month Lee asked South Korea's Fair Trade Commission to help the stalled review by the EU of the Hyundai Heavy-Daewoo shipbuilding merger make progress.

South Korea is home to the world’s three big shipbuilders – Hyundai Heavy, Daewoo Shipbuilding and Samsung Heavy Industries Co. The three Korean shipbuilders and China's state-owned Hudong–Zhonghua Shipbuilding occupy the LNG ship orders placed by European shippers.

South Korean shipbuilders have secured almost 97% of the orders placed for liquefied natural gas (LNG) carriers this year.

Write to Kyung-min Kang and Ji-hoon Lee at kkm1026@hankyung.com

Yeonhee Kim edited this article.

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