South Korean conglomerate Hanwha Group’s planned buyout of Daewoo Shipbuilding & Marine Engineering from its lead shareholder Korea Development Bank (KDB) has the potential to transform the yard into a more professional and profitable enterprise, market players said this week.
Following Monday’s announcement by KDB of the proposed sale of its controlling shareholding in DSME to Hanwha, reactions from the shipbuilding industry appeared positive.
Those watching the buyout moves pointed to what one described as DSME’s “terrible” debt to equity gearing, which has been in the range of 600% to 700%.
Hanwha is set to take a 49.3% stake in DSME — slashing KDB’s stake in the yard from 55.7% to 28.2%.
It is then due to inject KRW 2trn ($1.4bn) into the shipbuilder, which is set to reduce its gearing to nearer 200%.
In addition, KDB and the Export-Import Bank of Korea have agreed to extend soft loans to the company for a short period following the buyout.
Industry players who work closely with DSME officials said they appear happy about the Hanwha buyout.
One said that it has been difficult for the shipbuilder to work with KDB for the last 21 years.
- 1973: Okpo shipyard built by Korea Shipbuilding & Engineering Corp
- 1978: Company becomes Daewoo Shipbuilding & Heavy Machinery
- 1991: Daewoo Shipbuilding posts its first-ever profit
- 1999: Enters into workout programme after Asian crisis, KDB emerges as major shareholder.
- 2000: Daewoo Shipbuilding spun off from Daewoo Group
- 2001: Workout programme completed
- 2002: European Commission makes complaint to World Trade Organization over corporate restructuring subsidies
- 2008: Hanwha Group bids for the company as KDB looks for buyer
- 2020: Japan complains to WTO over subsidies after second restructuring
- 2021: Proposed merger with Hyundai Heavy Industries blocked by European Union
- 2022: Strike disrupts production for more than 50 days
- 2022: Second Hanwha $1.4bn bid accepted
He said the bank’s focus has often been on process over results and it has tried to intervene at every step but failed to take responsibility when issues have arisen, instead looking to apportion the blame for problems with DSME.
Brokers highlighted that DSME has had to justify each newbuilding contract to KDB, which has proved problematic at times and slowed decision-making for the yard.
“I believe the owner [Hanwha] has an astute sense of the industry,” one South Korean shipbuilding expert said. “Hanwha will do their best to make DSME more professional and money-making.”
But DSME union bosses held a press conference in front of the South Korean presidential palace on Tuesday demanding the sale be immediately suspended. They complained that KDB had held secret negotiations with Hanwha and agreed a rushed, low-priced deal.
The union also flagged up Hanwha’s lack of shipbuilding experience and questioned whether it would be able to run the shipyard smoothly.
Among DSME’s compatriot competitors, one yard source said that once DSME is privatised and not state-owned, there will be fairer competition among shipbuilders in South Korea.
Hanwha will do their best to make DSME more professional and money-making
— South Korean shipbuilding expert
Market watchers said that while Hyundai Heavy Industries missed out on its merger with DSME, it remains the world’s largest shipbuilder. The new pairing could prove more problematic for Samsung Heavy Industries, whose group has been looking to offload its shipbuilding interests.
Those watching the buyout said it is too early to predict what a Hanwha-controlled DSME will look like.
Some believe the defence and energy-focused conglomerate, which is particularly interested in the yard’s naval expertise, will move to extend the shipbuilder’s operations.
They said the pick-up in newbuilding orders, along with encouragement from the government, had piqued Hanwha’s interest to revive its interest in the yard, for which it previously made an offer in 2008.
But others were concerned that Hanwha’s strong presence on defence could result in DSME scaling down its commercial shipbuilding activities.
Overall, South Korean industry players said Hanwha has a good reputation and has been very successful, particularly in its takeover and growth of its petrochemical and defence businesses.
Newbuilding brokers said the sell-off of DSME was widely expected, particularly following KDB’s disposals of its shareholding in South Korean yards Daehan Shipbuilding and STX Offshore & Shipbuilding this year.
They identified Hanwha as a potential buyer that had been “sniffing around” for some time and said the conglomerate’s emergence as the chosen bidder was not surprising, with one describing the reaction to it as “quite underwhelming”.
Brokers in South Korea and Europe said those with newbuilding contracts with DSME or in the process of negotiating them should not anticipate any issues as the contracting party essentially remains the same.
KDB aims to finalise an agreement with Hanwha before the end of the year and complete its transaction in the first half of 2023.