Politics, price and succession shape Hyundai Heavy and Daewoo mega-merger

Politics, succession planning and the future direction of newbuilding prices are all in play as South Korea seeks to merge the world’s two largest shipbuilders into one super yard group with an orderbook worth more than $35bn.

Korea Development Bank has confirmed plans to sell its majority holding in DSME to Hyundai Heavy Industries in a near $2bn transaction.

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Shipowning clients of HHI tell TradeWinds they are positive about the combination, despite the possibility of higher prices down the line. But some question how much extra leverage Sam Ka, SY Park and other leaders of the future combined company will have when they sit down at the negotiating table.

A desire to merge HHI and DSME, however, has its origins in the corridors of power in Seoul, rather than the potential impact on activity under the cranes of Ulsan and Koje, some believe.

“The deal is designed by the South Korean government to restructure the shipbuilding sector,” one leading analyst told TradeWinds.

They explained while Samsung Heavy Industries has been invited to make on offer, Hyundai is the yard to undertake the “kitchen-sink works.”

Korea Development Bank’s decision to exit its position in DSME comes two years after bailing out the shipbuilder which had run into financial difficulties.

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It coincides with a period of succession planning by the Chung family that controls HHI, which necessitates the consolidation of its political connections, the analyst reasoned, noting it was HHI rather than the family's crown jewell Hyundai Heavy Holdings undertaking the deal.

“As a result, HHI-DSME will form a super-shipbuilder and it will increase the bargaining power of the company significantly, especially in LNG and tankers,” the analyst added.

'Cut-throat competition'

The two yards boast the largest orderbooks in the business, and are dominant in the LNG, container and tanker sector, alongside compatriot Samsung Heavy Industries.

DSME is sitting on a $14.2bn backlog of 86 vessels, while HHI and its three major shipbuilding spin-offs share a 289 ship orderbook worth almost $22bn, according to VesselsValue.

The healthy numbers do not tell the full story. “Shipyards in South Korea have lost money for so long government does not have an option,” was one shipowner’s assessment of this week's developments.

Another major tanker owner explained: “The shipbuilding industry has not performed well in recent times and cut-throat competition among the shipyards has enticed more shipbuilding than what our industry needs.

“Although the prospective deal between HHI and DSME is unlikely to reduce capacity, it might install better financial discipline that could move prices up over time and thereby reduce speculative ordering by non-industry players at loss making prices.”

The potential exit of DSME from the market could work in Hyundai’s favour. Owners describe DSME as the most aggressive of the Big Three Korean yards on pricing, despite the support received from the state following its high-profile financial difficulties.

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“If it was not for HHI being the best shipyard in the world, it would have been dead by now,” one shipowner observed of the competitive landscape in which HHI needed to operate.

With the ultra-competitive DSME potentially out of the picture and under the Hyundai umbrella, South Korean shipyards would be better placed to push prices upwards, supporters of the deal say.

Despite this possibility - which was cited by KDB chairman Lee Dong-gull as one of the motivators for the move this week -shipowning clients of Hyundai tell TradeWinds they are positive about the pending mega-merger.

“Am I happy as a shipowner that this is happening? Generally, yes,” explained one respected shipowner. “Short-term there could be a bit of a shock [on price]. Long-term it should help provide a more stable shipping market.”

Another established HHI client was also content to hear the news. “For current HHI customers, I do not anticipate any changes in build quality or communication,” he said.

“For future business, you have one less major competitor who also happened to be the most aggressive.”

While lower prices are one declared public driver for the deal, one shipowner who has done business with both yards questioned what leverage the super-sized market leader would have.

“If a merger were to take place, in the next discussion with Hyundai-Daewoo the first opening speech on their side will, be 'we are looking for higher prices'. If they didn’t say that I would be surprised,” he said.

“Whether they actually manage to do that is another matter. I’m not sure the owners will say, in total panic, ‘we better order before these guys get really nasty’.

"The market is the market and you can afford to pay a certain figure for a ship. If they try for more and it’s not possible eventually it will come down.”

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VesselsValue figures show DSME has a $6.9bn tanker backlog, coupled with $2bn plus LNG and containership catalogue.

Hyundai yards have $6.8bn worth of tankers on their books, alongside a similar standing in gas and a $4.4bn container orderbook.

With such a strong standing in major markets, some suggest the merged company would reorganize with facilities focused on specific vessel types.

While Sam Ka and SY Park are spoken of as some of the best people in global shipbuilding, the relationship between DSME executives and the yard’s major customer John Angelicoussis is seen as one of the closest in the business.

“For HHI taking out one of your biggest competitors out on certain sectors is a sign of strength,” a top shipbroker told TradeWinds. “I can’t imagine Sam Ka will be ignoring John Angelicoussis, can you?”