Minority shareholders back Hapag-Lloyd’s bid for HMM

HMM Algeciras. [Courtesy of HMM]

As the takeover battle for South Korea’s largest container carrier HMM Co. is underway with the participation of domestic and foreign companies, HMM’s minority shareholders have launched a shareholder action to rally behind a potential acquisition by Hapag-Lloyd AG, Germany’s top container shipping line.

According to sources from the financial investment industry on Monday, HMM’s minority shareholders are convening within an online community to amass shareholder proxies and preparing a statement in favor of Hapag-Lloyd’s takeover bid for HMM. This move comes ahead of the imminent selection by state-run Korea Development Bank (KDB), the largest shareholder of HMM, scheduled for later this month, where a shortlist of prospective companies advancing to the final bidding phase will be announced.

Some members of the minority shareholder group have reportedly initiated direct contact with Hapag-Lloyd’s headquarters in Germany. Their standpoint revolves around the principle that if KDB’s intention is to optimize the recovery of public funds, affording the German shipping giant an opportunity to engage in the primary bidding process is imperative.

KDB and the Korea Ocean Business Corporation (KOBC) have decided to convert their perpetual bonds, including convertible bonds (CB) and bond with warrants (BW), into shares upon completion of the sale of HMM due to concerns about potential breaches of duty, and minority shareholders argue that excluding Hapag-Lloyd from the shortlist could potentially transgress their duty, especially considering the German firm’s financial resource advantage over local contenders.

According to the shipping industry insiders, Hapag-Lloyd, ranked as the world’s fifth-largest shipping company, boasted a substantial liquidity of $10 billion as of June. The company is known to have selected foreign investment bank Goldman Sachs as its advisory firm and offered a higher price than other competing companies in the preliminary bid for HMM.

HMM’s minority shareholders are reacting sensitively in particular as there is a precedent for KDB and KOBC to convert perpetual bonds into shares. HMM’s share price rose sharply in 2020 and 2021 when the shipping industry experienced an unprecedented boom due to Covid-19, but when KDB and KOBC converted CBs into shares in 2021, the share price plummeted due to the flood of shares issued.

A sign board of Korea Development Bank (KDB). [Photo by Lee Chung-woo]

They argue that KDB and KOBC have been making decisions that undermine shareholder value and that given the downturn in the shipping industry, Hapag-Lloyd, the world’s fifth-largest shipping company, is the right candidate to boost HMM’s valuation.

Industry insiders also believe that Hapag-Lloyd is the only company capable of financing the acquisition of HMM on its own. Local companies that participated in the preliminary bid, such as LX International Corp., Dongwon Industries Ltd., and Harim Group, all have cash reserves of only around 1 trillion won ($755.67 million), making it essential to mobilize additional funds.

If the prices proposed by the potential buyers are too low, KDB will also have to adjust the number of shares to be sold, which could result in too much residual shares for the state-run bank.

There is talk in the industry, however, that it will be difficult for Hapag-Lloyd to be selected as the final bidder due to public sentiment because if the country’s only national shipping company is sold overseas, it could spark controversy of an outflow of national wealth.

The Federation of Korea Maritime Industries and the Busan Port Development Association released a joint statement last week, saying that the sale of the national carrier to Hapag-Lloyd may lead to an outflow of invaluable national assets, including the country’s container shipping assets, terminals, and decades-worth of accumulated maritime logistics expertise.

KDB Chairman Kang Seog-hoon also stated at a press conference in June that the “national flag carrier carries great significance” and that the bank “wants the acquirer to be a company that has a strong commitment to contribute to the Korean shipping industry and has the capital and management capabilities.”

In response, some industry insiders speculate that KDB may cancel the sale altogether as the bidders are mid-sized or foreign companies, but KDB says there is no such possibility.

“We plan to continue to pursue the sale with the goal of completing it within the year,” said a KDB official. “We will select a shortlist of candidates after comprehensively taking various factors into account.”