Aircraft maker KAI: Hanwha Group's new M&A target?

Hanwha Group’s agreement to buy a controlling stake in Daewoo Shipbuilding & Marine Engineering (DSME) Co. for 2 trillion won ($1.4 billion) is spawning market speculation that the conglomerate might target South Korea’s sole aircraft maker Korea Aerospace Industries Co. (KAI) for a new acquisition.

KAI, 26.41% owned by the Export-Import Bank of Korea (KEXIM), is not up for sale and Hanwha Group denied such speculation, saying it has no such plan for now.

But market insiders said that KAI must be a coveted target for Hanwha to round out its arms manufacturing business, one of its core growth drivers.

The purchase of DSME, the world’s top submarine and warship builder, will diversify Hanwha’s portfolio into weapons for sea battles. Hanwha is a leading manufacturer of land weapons such as self-propelled howitzers and armored vehicles.

KAI was formed by combining the aerospace businesses of Korea's top three conglomerates at the time: Samsung, Hyundai and the now-defunct Daewoo. It was launched in 1999 after KEXIM injected public money into the new entity following the Asian financial crisis.

South Korea’s National Pension Service holds another 10.33% in KAI as the No. 2 shareholder.

Market insiders estimate the value of KEXIM’s stake in KAI at about 1.6 trillion won, including a 30% premium for management rights.

Hanwha Group’s heir apparent and Vice Chairman Kim Dong-Kwan is said to be determined to further grow the group’s aerospace business. The eldest son of Hanwha Group Chairman Kim Seung-youn is heading up aircraft engine producer Hanwha Aerospace Co. as chief executive.

For the DSME deal, Hanwha Aerospace is set to take half of the new shares worth 2 trillion won to be issued by DSME.

Investors had a muted response to speculation about Hanwha's possible bid for KAI. The share price of KAI declined 2.59% to 47,050 won on Tuesday morning.

Rather they are concerned about the financial burden Hanwha Group would bear to buy DSME.
 
Hanwha Aerospace extended its losses for a third straight session on Tuesday morning, down 2.42% to 64,500 won.

On Monday, the stock plunged 10.80% and its affiliate Hanwha Systems finished down 7.17%, in reaction to news of the Hanwha-DSME deal.

Shares in DSME erased their Monday gains to sink 15.43% to 21,200 won. The size of its planned 2 trillion-won rights offering is deemed so big that it could significantly reduce the value of the existing shares.

Write to Ik-Hwan Kim at lovepen@hankyung.com
Yeonhee Kim edited this article.