Investors turn wary as EU may disapprove KSOE-DSME shipyard marriage

Investors turned wary about a possible upset to the major M&A deal that would create the world’s largest shipbuilder in South Korea upon reports that the European Union is tilted towards disapproving the planned merger of Korea Shipbuilding & Offshore Engineering (KSOE) and Daewoo Shipbuilding & Marine Engineering (DSME).

The potential veto by the European antitrust authority could adversely affect DSME’s restructuring efforts for financial improvement and undermine the competitiveness of Korea’s shipbuilding industry in general.

Shares of KSOE ended Wednesday 0.6 percent up at 100,500 won ($84.38) after falling to 96,900 won during the session. DSME ended 0.8 percent down at 24,950 won.

Foreign media outlets reported European Union will unlikely approve the proposed shipbuilding marriage due to monopoly concerns in supply of cargo vessels.

The European Commission will soon conclude its three-year long review of the merger by Jan. 20.

Europe, home to large customers of KSOE and DSME, is an essential region where approval for the merger is a must as a veto means the shipbuilders cannot perform business as a combined entity there and can upset the state-arranged marriage signed with Korea Development Bank (KDB), their main creditor bank, in March 2019. The deal requires approval from six jurisdictions.

The proposed merger plan received the green light from Kazakhstan, Singapore and China, and is still pending in the EU, Korea and Japan. Korea and Japan may follow the EU’s final decision.

EU concerns are thought to center around market monopoly as the two Korean shipbuilders command more than 60 percent of LNG and VLCC orders. The monopoly concerns have also been raised since KDB pushed for the sale of DSME to KSOE, the shipbuilding holding company of Hyundai Heavy Industries Group.

Italy’s Fincantieri, the No. 1 player in the cruise ship market, gave up its planned acquisition of No. 3 player Chantiers de l'Atlantique of France in the face of EU’s antitrust investigations that lasted three years.

Given the boom in shipbuilding, the impact of a failed deal on the management of the two shipbuilders is not expected to be significant for the time being.

But in the long term, it can adversely affect DSME's financial situation and competitiveness of the Korean shipbuilding industry. KDB may be blamed for its pushing ahead with the sale of DSME.

KSOE would suffer less on eased financial burden. It would be responsible for recapitalization of 1.5 trillion won ($1.25 billion) in addition to 1 trillion won cash support once the merger is confirmed. If the deal falls through, DSME’s outlook could turn foggy. DSME’s debt-to-equity ratio already rose to 297.3 percent as of the third quarter of last year.

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