Hanwha Accepts Regulator’s Terms Clearing Way for DSME Acquisition

South Korea’s antitrust regulators on Thursday cleared the way for Hanwha Group, the country’s seventh largest conglomerate, to proceed with the recapitalization and assume management control of the financially troubled Daewoo Shipbuilding & Marine Engineering operation. The regulators however placed strict conditions on the approval designed to ensure competition in the defense sectors where Hanwha is the leader in component systems and DSME dominates the submarine construction sector.

“This is the first time for us to impose corrective measures against a merger of companies in the defense industry, Han Ki-jung, Chairman of the Fair Trade Commission said announcing the decision. “We will decide whether or not to extend the three-year measures, depending on market conditions and regulatory reforms.”

DSME competitors had raised concerns that the planned transaction would give Hanwha an unfair advantage in shipbuilding defense contracting. They called on the FTC to ensure that Hanwha could not dominate the segment either by charging higher prices for components or restricting access to information vital in the bidding and construction process. 

At the same time, the competitors said they strongly supported the plan to stabilize DSME under the belief that it would strengthen the shipbuilding sector and increase its overall competitiveness. For many years, DSME had been controlled by the government through a rescue plan that saw Korea Development Bank become the largest shareholder. KDB, however, said the shipyard required new management and financial support to advance its future technologies while competitors said in its struggle to gain orders DSME had been under-cutting pricing.

Hanwha responded to the FTC announcing that it had decided to accept the decision due to the urgent need to normalize DSME, whose business performance they said has continued to deteriorate. They highlighted that the shipbuilder has reported 10 consecutive quarters of financial losses while reporting that DSME is expected to “suffer large-scale losses compared to plan” in the yet-to-be-announced first quarter. They highlighted that orders have fallen from $4.2 billion in Q1 2012 to $800 million this year. Further, they said the company has fallen from 13,000 employees to 8,300 with critical losses at the manager level. Over the past two years, Hanwha said the shipbuilder’s losses had reached over $2.5 billion with its debt ratio ballooning to 1,600 percent. They however noted that it will be the first time since 2001 and the workout led by KDB that management of the company has been normalized.

“Despite a bottleneck in management caused by the conditional approval, we decided to accept the authority’s decision from a broader viewpoint, in order to normalize DSME as soon as possible,” Hanwha said. “With the acquisition of Daewoo Shipbuilding & Marine Engineering, Hanwha will lay the foundation for growth as a true global defense company by equipping itself with a ‘land, sea and air integrated system’ that encompasses the marine as well as the existing space and land defense industries.”

Among the specific conditions imposed by the FTC is a requirement to maintain level pricing for the components systems supplied to DSME with those acquired by competitors. Competitors must also receive technical data when requested and Hanwha can not share trade secrets learned from competitors. Hanwha must report to the FTC every six months for three years on the steps taken to not discriminate against business rivals. 

The FTC was the last of the regulators to issue approval following six countries including the UK as well as the European Union, which had objected to the prior deal for Hyundai to acquire DSME. 

Hanwha reports that the transaction is expected to be completed in May. Five of the group’s companies including its aerospace and systems businesses will be making the combined investment providing nearly $1.5 billion in paid-in capital for DSME. In turn, Hanwha will receive a 49.3 percent stake, becoming the largest shareholder, and receiving management control. Hanwha said it will appoint directors through a general shareholders’ meeting.

Hanwha is emphasizing the strategic opportunities created by the acquisition of DSME focusing on the global market for defense systems. Media is comparing the new company to a “Korean Lockheed Martin.” Korean media is reporting as part of the transaction that DSME will be renamed Hanwha Ocean, although the company has not yet commented on its management or detailed strategic plans for the shipbuilder.