Harim, LX, Dongwon join race to buy Korean shipping giant HMM

HMM Co.’s container ship. [Courtesy of HMM]

The race to acquire HMM Co., South Korea’s largest shipping company, is heating up as three of the country’s top 50 business groups submitted preliminary bids on Monday.

According to sources from the investment bank (IB) industry on Monday, Samsung Securities Co., the lead manager for the HMM sale, received preliminary bids by 5 p.m. Monday. Harim Group-JKL Partners consortium, LX Group, and Dongwon Group were among the bidders.

Germany’s largest container shipping company, Hapag-Lloyd AG, also reportedly joined the bidding.

Industry insiders see that it is unlikely that the country’s only national shipping company will be sold overseas but there is a possibility that a foreign company could join hands with a local candidate and participate as a strategic investor (SI).

Focus is now drawn on whether the sale will be finalized by the end of the year, which is what Korea Development Bank is aiming for.

The market is skeptical, however, that the candidates will be able to mobilize up to 6.5 trillion won ($4.85 billion) for the acquisition, as they have less than 1.5 trillion won in cash and cash equivalents.

Even if they can attract financial investors (FIs), they will still need to borrow more than 3 trillion won for the final acquisition.

The bidders have been focusing on recruiting financial firms for funds.

Harim Group has secured major banks such as Shinhan Bank, KB Kookmin Bank, and Woori Bank, and securities firms such as Mirae Asset Securities Co. as partners.

Dongwon Group has tied up with Hana Bank and is expected to mobilize its affiliate Korea Investment & Securities Co.

LX Group is expected to align with a large securities firm.

However, it is still a burden that borrowing more than 3 trillion won will cost more than 240 billion won in interest per year. Currently, the interest rate for acquisition finance, or loans for merger and acquisition (M&A), from commercial banks is around 8 percent.

The seller plans to select qualified bidders by comprehensively evaluating their ability to operate a national shipping line and their ability to mobilize funds. It will then conduct a preliminary due diligence for about two months before selecting the preferred bidder and signing a final contract.

KDB is hoping to finalize the process by this year.

A total of 398,790,156 shares are up for sale. This includes 200 million shares converted from 1 trillion won worth of perpetual bonds such as convertible bonds (CB) and bond with warrants (BW) held by KDB and the Korea Ocean Business Corp. (KOBC).

The ownership ratio is 38.9 percent, based on the conversion of all the remaining perpetual bonds held by KDB and KOBC, which are not included in this sale, into shares.

The perpetual bonds held by KDB and KOBC in addition to the shares up for sale may be a burden for the potential buyers.

Even if a successful bidder were to acquire a 38.9 percent stake in HMM, the remaining perpetual bonds would be converted into shares, leaving KDB and KOBC with a 32.78 percent stake.

There is also a possibility that KDB and KOBC could suspend the sale process if they determine that there are no qualified candidates among the bidders.