Hanwha’s purchase of DSME may hit snag on contingent liabilities

DSME Drillship [Source : DSME]

Concerns are growing that Hanwha Group’s deal to buy Daewoo Shipbuilding & Marine Engineering Co. (DSME) may be delayed or canceled after the buyer has found the shipbuilder’s $209.6 million worth contingent liabilities in the last stages of due diligence to buy the world’s fourth-largest shipbuilder.

Claims for damages, or contingent liabilities, related to shipbuilding contracts reached $209.6 million at the end of the third quarter. This is an increase of about $200 million from end of June.

DSME saw a loss of about $200 million from selling a drillship to an oil exploration company after the original owner canceled the contract. This implies that the shipbuilder sold the vessel at a steep discount. The company lodged a lawsuit against the original client for unilaterally notifying the cancellation.

“Losses related to this case have already been reflected in the company’s earnings,” a DSME official said.

Hanwha Group signed a preliminary agreement in September to buy a 49.3 percent stake and managerial rights in DSME at 2 trillion won ($1.4 billion) through a rights offering to the group’s subsidiaries, including Hanwha Aerospace. Korea Development Bank, the current owner of the shipbuilder, will later sell a 28.2 percent of its stake to Hanwha.

Hanwha has been conducting a six-week due diligence on DSME, and it’s known that the agreement includes a clause that the deal to buy the shipbuilder can be withdrawn if contingent reliabilities of more than 1 trillion won are uncovered during the due diligence process.

Drillships are built to drill for crude and gas in deep sea. But since oil prices plunged in the second half of 2014, customers canceled orders and shipyards were forced to keep them in their inventory until they found new owners. The prices of drillships have dropped to as low as $200 million from $600 million over the period.

DSME currently has three drillships in its inventory that the original owners failed to take. Of those, two have been sold. It said the possibility of insolvency isn’t high because about 70 percent of the contract prices have been paid. It’s still looking for a buyer for the third drillship.

DSME shares were up 1.24 percent at 20,400 won in the mid-day session on Friday.