Harim takeover of debt-ridden HMM draws concerns
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It was reported that Harim Group withdrew its request to HMM's controlling stakeholders to postpone converting perpetual bonds to common shares for three years as a means to reduce its burden to fund the deal, due to Dongwon Group's claim that "it is not fair."
Hwang Yong-sik, a business professor at Sejong University, said, "It is unlikely that the shareholders would accept Harim's request to delay the date to convert the perpetual bonds. Harim Group, which has the experience of acquiring Pan Ocean, will not go through a 'winner's curse' only if it has a solid plan B."
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Harim Group’s consortium was named as the preferred bidder for debt-ridden container ship company HMM, leaving concerns about how it would fund the acquisition worth 6.4 trillion won ($4.9 billion), industry sources said Tuesday.
Outbidding rival Dongwon Group, the company is expected to take over the 57.9 percent stake owned by controlling shareholders of HMM -- the state-run Korea Development Bank and Korea Ocean Business Corp. The creditors have sought to get the shipper back on track through debt restructuring and other relief measures since 2016.
If Harim Group closes the deal, it would raise its assets to 42.8 trillion won, making it South Korea’s 13th-largest conglomerate, up from No. 27. That would make it likely to rank higher than CJ Group.
The two government institutions are to sign a stock purchase agreement with the company after negotiating the terms and finalizing the deal in the first half of next year.
After acquiring the world’s eighth-biggest container shipper, Harim Group looks to create synergy with its bulk shipping subsidiary Pan Ocean.
“HMM and Pan Ocean could complete an ideal business portfolio ranging from container to bulk carrier and special ship, expanding the footing in global markets,” said an official from Harim Group.
“With the two companies’ history and expertise in responding to the rapid changes in supply and demand and price fluctuation, we would be able to tackle the global freight recession.”
Combining HMM’s 105 and Pan Ocean’s 301 ships, the two would be operating over 400 ships, competing head-on with the two top global container shippers, Maersk and MSC.
“Most of us think of Harim as a chicken brand. But the food business takes up a small portion of the company’s portfolio,” said a source from an asset management company. “The Harim chairman has been keen on boosting future drivers of growth, research and development, and diversifying its business portfolio.”
Of the 50 subsidiaries, Pan Ocean accounted for 40.8 percent of the group’s revenue, followed by feed producer Farmsco’s 11.9 percent and poultry unit Harim’s 9.2 percent as of last year.
But industry insiders say Harim could face a debt overhang in financing the acquisition.
The company’s cash and cash equivalents are approximately 1.6 trillion won -- far lower than the acquisition cost of 6.4 trillion won.
The company said it plans to secure capital by selling shares and ships and issuing perpetual convertible bonds that have no maturity date and can be converted into equity with its consortium partner, private equity firm JKL Partners.
It was reported that Harim Group withdrew its request to HMM’s controlling stakeholders to postpone converting perpetual bonds to common shares for three years as a means to reduce its burden to fund the deal, due to Dongwon Group’s claim that it was unfair.
But the Harim official told The Korea Herald, “Everything is on the table,” hinting it might ask for leniency from the two state institutions when negotiating the terms of the purchase.
Hwang Yong-sik, a business professor at Sejong University, said, “It is unlikely that the shareholders would accept Harim’s request to delay the date to convert the perpetual bonds. Harim Group, which has the experience of acquiring Pan Ocean, will not suffer a ‘winner’s curse’ only if it has a solid plan B.”
The “winner’s curse” refers to the tendency for the winner of a bid in an auction to pay more than an asset’s intrinsic value.
Hwang added that the company faces challenges in expanding its shipping business because it would enjoy little financial gain due to the high acquisition cost, despite the downturn in the overall freight industry.
Following the breaking of news on the megadeal, HMM’s labor union announced it plans to inform the management that it would halt collective bargaining, claiming Harim Group, which is short on cash, might take advantage of the company’s 10 trillion won of cash capital.
The stock price of Harim Group’s poultry subsidiary Harim surged by 29.95 percent to 3,775 won at the closing bell. Harim Group and HMM’s shares climbed 14.14 percent to 7,990 won and 5.07 percent to 18,340 won, respectively.
By Byun Hye-jin(hyejin2@heraldcorp.com)
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