Eastar M&A Collapse Sequence..."Final Decision to Be Made Later"

"Eastar Fails to Meet Precondition, Contract Termination Condition Met"
Leaves Door Open for 'Government Mediation and Other Considerations'... Jeju Air Passes the Ball

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Je-hoon] Jeju Air has passed the responsibility for the success or failure of the acquisition and merger (M&A) of Eastar Jet to the government. Jeju Air stated that it "has met the conditions for terminating the Stock Purchase Agreement (SPA)" due to Eastar Holdings' failure to fulfill the acquisition preconditions, but left room for a final decision considering government mediation. The industry predicts that Jeju Air will ultimately cancel the M&A with Eastar Jet, as additional government support is realistically unlikely.

On the morning of the 16th, Jeju Air announced, "We received an official letter from Eastar Holdings regarding the fulfillment of contract preconditions yesterday, but there was virtually no progress," adding, "Therefore, the contract termination conditions have been met."

Earlier, on the 1st, Jeju Air sent a final ultimatum to Eastar Holdings stating, "If the acquisition preconditions are not met within 10 business days, the contract may be terminated." This was due to concerns over 'joint insolvency,' as unpaid debts alone amount to 170 billion KRW.

Since then, Eastar Jet has been negotiating with lessors, oil companies, ground handling companies, and aviation authorities to reduce unpaid debts below 100 billion KRW through reductions and payment deferrals. Additionally, to reduce unpaid wages amounting to approximately 26 billion KRW, the workers' representatives secured agreement to return two months' worth of leave allowances. Notably, the Eastar Jet Pilots' Union also agreed to return unpaid wages on the condition of job retention, accelerating progress. However, due to the worsening business environment caused by the COVID-19 pandemic, industries involved have expressed negative views on debt reductions, failing to resolve the fundamental preconditions.

With Jeju Air's announcement, the first restructuring effort in the aviation industry is on the brink of collapse. If the SPA is finally terminated, Eastar Jet is likely to enter court receivership and liquidation. Approximately 1,600 Eastar Jet employees face the risk of losing their jobs. Legal disputes over deposits and the failed acquisition are also inevitable.

However, Jeju Air left the door open regarding the final decision, stating it would "consider government mediation." In effect, the last responsibility has been passed to the government. So far, Jeju Air has agreed to receive 170 billion KRW in acquisition financing from KDB Industrial Bank and others, assuming the deal is successful, but the industry widely views this as insufficient to resolve unpaid debts and normalize management.

Therefore, attention is focused on what measures the government, now holding the responsibility, will take. An industry insider said, "Minister Kim Hyun-mi of the Ministry of Land, Infrastructure and Transport has expressed willingness to consider additional support based on the success of the deal after meeting with top executives of both companies," adding, "Since a mass layoff would be inevitable if the M&A fails, the government cannot just stand by."

However, concerns over fairness with other low-cost carriers (LCCs) and accusations of preferential treatment make it likely that the acquisition will proceed toward failure. Another industry insider said, "For Jeju Air, which faces responsibility and government mediation, it would be difficult to abruptly notify contract termination," adding, "Considering various circumstances, they are likely weighing the timing."