Grim outlook for HMM bidding round as sale price increases

HMM Algeciras [Courtesy of HMM]

The price tag on the stake sales of South Korea’s logistics and shipping company HMM Co. is set to rise to 6 to 7 trillion won ($4.65 billion to $5.37 billion), raising possibilities that the main bidding round scheduled for Thursday will be impacted as HMM’s sellers, including the Korea Development Bank (KDB Bank) and the Korea Ocean Business Corporation (KOBC), have set a price at a higher level than the market value.

According to the investment banking (IB) industry on Wednesday, the HMM sales price will be based on a weighted arithmetic average of the stock price over the last 30 trading days. The average share price of HMM is around 15,300 won, and the company’s 57.9 percent stake for sale is valued in the range of 6.1 trillion won, with a management premium to be added to determine the expected selling price. Even if the premium is only 10 to 20 percent, the price will rise to the level of 6.7 to 7.3 trillion won.

This is a much higher figure than the bidders’ estimate of $5 trillion. They believe there is already a premium in the stake value of 6.1 trillion won as the sellers currently hold 336 million in outstanding perpetual bonds, which, if converted into shares, would reduce the company’s stake of 398.79 million shares for sale to 39 percent.

The value relative to market cap is in the 4.3 trillion won range, and the selling price comes to around 5 trillion won even with a 10-20 percent management premium. Some analysts also say that the worsening business conditions in the shipping industry should be considered as HMM’s operating profit plummeted 97 percent in the third quarter of 2023 from a year ago.

The widening gap between the sellers and buyers raises the possibility that the bidding scheduled for Thursday will be canceled as the HMM sale will fall through if the bids are lower than the expected selling price. Some candidate buyers are expected to have last-minute thoughts on whether to join the bidding given the increased gap between their bid and the expected price.

“I do not think it’s the right time to comment on the outcome of the sale,” Cho Seung-hwan, minister of oceans and fisheries, said while meeting with journalists on Wednesday. “We are thoroughly preparing for all the possibilities.”

Meanwhile, market insiders state that the selling price is largely up to the sellers. The expected price of listed securities is set at a weighted arithmetic average of the stock price over a 30-day period under the State Property Act, but this rule can be applied mutatis mutandis in accordance with professional due diligence and the characteristics of the assets to be sold.

This is why some analysts believe that KDB Bank, which is currently under inspection for its mergers and acquisitions (M&A) deals by The Board of Audit and Inspection of Korea, could have made such a move being mindful of the allegations of a shoddy sale. The bank recently presented a shareholder agreement that capped HMM’s dividend at 1.5 trillion won over three years to bidders.

There are complaints among bidders about the sellers’ last-minute change in their position, saying it is problematic for the sellers to suddenly propose a higher price based on the current stock price ahead of the bidding when the selling price was set with a lower share price in the preliminary bidding stage and the shortlist was already announced. The bidders have been arguing that overall conditions should be factored in setting the selling price, including the diluted value of the stake after the perpetual bonds’ conversion into shares and the deteriorating shipping industry.