[KH Explains] Why Hanwha’s DSME takeover has not yet gained approval at home

W2tr deal hailed as savior for ailing shipbuilder and local economy, but pending antitrust decision spurs speculation

The Daewoo Shipbuilding and Marine Engineering shipyard in Geoje, South Gyeongsang Province (DSME)

Hanwha Group’s acquisition of Daewoo Shipbuilding and Marine Engineering is facing a final obstacle, as South Korea’s Fair Trade Commission is yet to give the green light for the high-profile takeover.

Since signing a megadeal worth 2 trillion won ($1.53 billion) to buy a 49.3 percent stake in DSME from the state-run Korea Development Bank in December last year, Hanwha, the nation’s seventh-largest conglomerate, has obtained approval from other necessary antitrust authorities of Britain, China, the European Union, Japan, Singapore, Turkey and Vietnam, but not at home.

Korea’s FTC wouldn’t say it is delaying its decision because the review of the deal that started in December has not yet passed the deadline roughly set for June, but speculation is growing as to what is prolonging the process for a deal that has been hailed as a savior for the ailing shipbuilder and the local economy.

In a rare media briefing earlier this month, the FTC said it is still examining the takeover deal after multiple companies raised concerns over Hanwha’s potential monopoly in government bids for battleships. The antitrust watchdog did not disclose the names of the rival firms. Besides DSME, Hyundai Heavy Industries, HJ Shipbuilding and Construction and SK Oceanplant, formerly known as Samkang M&T, are the country’s major builders of military ships.

Referring to Hanwha’s high market share in the weapons system, the FTC said its takeover of DSME may put competitors at a disadvantage, as Hanwha could discriminately hand out technical information of military ships or meddle with the prices of necessary battleship parts.

The FTC, however, received an opinion from the Defense Acquisition Program Administration that there would not be concerns over limiting competition in the battleship market, according to reports citing unnamed industry and political sources.

The reports also alleged HD Hyundai, the parent company of Hyundai Heavy Industries, has filed an objection to the FTC on four separate occasions against Hanwha’s takeover of DSME. The FTC declined to confirm the reports, citing the ongoing review.

A shipbuilding industry source pointed out that HD Hyundai may be feeling imminent pressure, particularly amid its recent legal troubles that may risk penalties when bidding for future DAPA projects. The company’s eight employees were found guilty of violating the Military Secret Protection Act by the Ulsan District Court in November last year.

“Head-to-head competition with DSME, which is expected to be normalized (if the takeover is approved), could pose challenges for HD Hyundai. So raising objections to push back the acquisition process and getting an approval with many conditions would put HD Hyundai in an advantageous position,” said the source.

HD Hyundai, however, flatly refuted the claims that it was purposefully delaying the FTC’s review of the DSME acquisition.

“In general, the FTC conducts a process of taking opinions from various stakeholders when reviewing a combination of enterprises. It is not appropriate for us to comment on the ongoing case the FTC is reviewing through relevant procedures,” said an HD Hyundai official.

Until the 2010s, DSME was a top builder of battleships. But after years of failed sell-off attempts and prolonged losses, it has been outpaced by local rivals, especially HD Hyundai, in securing new orders.

In 2019, HD Hyundai, then known as Hyundai Heavy Industries, sought to acquire DSME, but the deal fell apart last year after the antitrust arm of the EU vetoed it over monopoly concerns in the global liquefied natural gas carrier market.

Hanwha claims that objections from competitors have delayed the normalization of DSME. Despite public funding of over 10 trillion won having been injected into DSME, the ailing shipbuilder has logged cumulative losses of 3.4 trillion won over the past two years -- meaning there is a slim chance it would survive on its own.

Hanwha said that a swift takeover is the only way to cut taxpayers' losses and normalize DSME. If the acquisition is not approved, Hanwha has voiced worries it will result in more use of public funds or the liquidation of the shipbuilder.

“Fair competition is required to enhance healthy competition and technology of the domestic battleship sector. Market competitiveness has been weakened due to the dominance of HD Hyundai and Samkang M&T’s cheap order intakes,” a Hanwha official said.

Meanwhile, local residents of Geoje, South Gyeongsang Province, where DSME is located, are calling on the FTC to give the green light.

Members of Geoje City Council and a local civic group on Wednesday called on the FTC to grant swift approval for Hanwha’s takeover of DSME. The council members said the acquisition needs to be completed as soon as possible to insure no damage is done to the local economy. The civic group on the same day held a protest in front of the FTC’s building at the Government Complex Sejong.

“The FTC is worried about a monopoly, but the defense industry has only one source of demand -- the government. So the concerns over limiting competition is thin,” said the group. “Despite the recession of the shipbuilding industry and the COVID-19 pandemic, the people of Geoje battled adversities with the hope that DSME would get back on track.”

By Kan Hyeong-woo(hwkan@heraldcorp.com)