In DSME takeover, it's defense contractors vs. shipbuilders

A group of companies with major interests in defense and shipbuilders are locking horns over a merger that could, in the view of one party, reduce competition.

Large cranes are established at Daewoo Shipbuilding & Marine Engineering (DSME)'s shipyard in Geoje, South Gyeongsang. [YONHAP]

A group of companies with major interests in defense and shipbuilders are locking horns over a merger that could, in the view of one party, reduce competition.

Five related companies — Hanwha Aerospace, Hanwha Systems, Hanwha Impact Partners, Hanwha Energy Singapore and Hanwha Convergence — announced a plan to buy Daewoo Shipbuilding & Marine Engineering (DSME), a troubled Korean shipbuilder, in September last year.

Korean shipbuilders including HD Hyundai, the country’s largest shipbuilder, raised concerns with the Fair Trade Commission (FTC) about the possibility of DSME having an unfair advantage in bids for military ship contracts once it is purchased by the Hanwha companies.

The acquirers say that the combination between the defense-focused group and the shipbuilder won’t trigger any monopoly concerns, especially in the domestic military ship market.

“The Defense Acquisition Program Administration, which is under the jurisdiction of the Ministry of National Defense, possesses all information regarding the pricing of weapons systems and their components in government-led defense procurement,” they explained Monday. “The administration's strict regulations prevent suppliers from offering preferential pricing to private companies in subcontracting deals, as the administration would become aware of any such discriminatory practices during the bidding evaluation process.”

HD Hyundai declined to comment about the issue.

The FTC held a press briefing last Monday to explain possible implications and concerns related to the acquisition. It suggested that market competition may be undermined in the navy vessel building business as a result of the merger.

Hanwha companies produce about 10 types of equipment for navy vessels, such as battle command systems and radars, while DSME builds navy vessels using the parts.

“If the technological information on the vessel parts is provided to the rival companies only on a limited scale, the rival companies may suffer a disadvantage in winning the shipbuilding contracts compared to DSME," said an FTC spokesperson.

The FTC is looking into the possibility that the merger between DSME, a builder of military ships and submarines, and the Hanwha's companies could limit the bidding activities of competitors. In particular, Hanwha Systems produces sonar radar and communications systems for ships, while Hanwha Aerospace manufactures propulsion and weapon systems.

Hanwha argues that HD Hyundai is intentionally delaying the evaluation of the merger to achieve a favorable position in the future naval vessel bidding process.

DSME could face trouble raising funds to build military ships it is already contracted to build.

The five companies filed a merger application in December to purchase 49.3 percent of DSME through a rights offering. Applications for the acquisition were filed with seven jurisdictions, Turkey, Britain, Japan, Vietnam, China and Singapore, which all gave the go-ahead for the takeover deal — leaving Korea as the last to make a decision.

BY SEO JI-EUN, PARK EUN-JEE [seo.jieun1@joongang.co.kr]