Lee Sang-jik, a member of the Democratic Party of Korea, decided to 'donate' all the shares he holds in Eastar Jet, but Jeju Air, which took over the responsibility, remains indifferent. This is because various issues such as unpaid wages and preconditions for acquisition have not been resolved. Inside and outside the industry, there is a considerable possibility that Jeju Air's merger and acquisition (M&A) of Eastar Jet may fail despite Lee's decision.
According to the aviation industry on the 30th, despite Lee's decision to donate his shares, Jeju Air has not shown any significant response regarding the resumption of the Eastar Jet M&A process. A Jeju Air representative stated, "We are currently in the process of understanding the intentions of Lee and Eastar Holdings," adding, "We have no special position."
Lee declared the day before that he would transfer all the shares he holds (38.6%) through Eastar Holdings to Eastar Jet. Eastar Holdings is a holding company 100% owned by Lee's two children.
Eastar Jet estimates the value of these shares at approximately 41 billion KRW. Through this, they aim to resolve convertible bond (CB) payments, various unpaid amounts, and unpaid wages amounting to 25 billion KRW.
Originally, Lee proposed to Jeju Air a reduction of 11 billion KRW from the sale price (54.5 billion KRW), but since he plans to transfer all shares including this, Eastar Jet explains that it is effectively more beneficial to Jeju Air. Kim Yoo-sang, head of the management control office, said at a briefing, "There will be a bigger pie than 11 billion KRW."
However, Jeju Air reacted with disbelief at the sudden proposal. A Jeju Air official said, "If the contracting party changes, it is no different from terminating the contract," adding, "We do not think they intended such an extreme move, but it is frustrating that the intentions of Lee and Eastar Holdings are unclear."
It is also unclear whether the contracting party will change from Eastar Holdings to Eastar Jet immediately. Choi Jong-gu, CEO of Eastar Jet, gave an ambiguous answer to a question about whether the contracting party would change at a press briefing the day before, saying, "For now, I think it is the company (Eastar Jet), but we will review it practically."
Contrary to Eastar Jet's claim that preconditions for acquisition, such as resolving the $31 million guarantee for Thai Eastar Jet, have been 'resolved,' Jeju Air maintains that nothing has changed. There is also an analysis that the practical benefits for Jeju Air are not significant. This is because if convertible bond issuance proceeds, various taxes, and unpaid wages are resolved, there will be almost no cash left in Eastar Jet.
For this reason, some say that despite Lee's 'bold move,' the possibility of the M&A succeeding remains uncertain. Jeju Air officially maintains that its 'intention to acquire remains unchanged,' but it is known that there is considerable negative sentiment within the AK Group and Jeju Air itself about completing the acquisition. Even if the acquisition is confirmed and 170 billion KRW of acquisition financing is supported by the government, considering various unpaid amounts in the 100 billion KRW range, funds needed for normalization, and funds required until the industry recovers, there is an argument that 'the tail may be bigger than the belly.'
Jeju Air's financial situation is also not easy. Due to the impact of COVID-19, it has already taken out 50 billion KRW in short-term loans and is also pushing for a rights offering. According to a recent report by eBest Investment & Securities, "Jeju Air's cash assets as of the first quarter are about 100 billion KRW, but fixed costs for the second quarter are estimated at 63.5 billion KRW," adding, "Considering the Eastar Jet acquisition, the current cash holdings are somewhat insufficient."
Eastar Jet appears to be pressuring Jeju Air for the M&A while also keeping a 'Plan B' in mind. CEO Choi said in a statement the day before, "We are wasting time without qualifying for government support due to the M&A process with Jeju Air," adding, "If the worst-case scenario materializes, Jeju Air cannot avoid responsibility." If the M&A fails and there is no government support, bankruptcy and liquidation procedures will be inevitable. This is interpreted as targeting the responsibility for the ongoing airline route shutdowns and workforce restructuring. Along with this, Eastar Jet repeatedly urged the government for financial support.
A representative of the Eastar Jet Pilots' Union said, "Although they said they would give up their shares, nothing has been clearly resolved regarding the contracting party, the scale and method of unpaid wage payments, which are key issues," adding, "This is why there are talks that Lee's side is trying to shift blame under the pretext of donating shares."
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