[HMM Independence②] Six Years of Privatization Drift... Three Challenges for Sale

HMM, the largest container shipping company in South Korea, was a headache for the government just three years ago. Despite receiving over 7 trillion won in public funds, its performance hardly recovered, often drawing criticism as "pouring water into a bottomless jar." However, the situation dramatically reversed starting in 2020. HMM consecutively broke its record for the highest performance ever, with cash assets reaching 13 trillion won. It soared brilliantly from an ugly duckling to a swan. With HMM's value increasing, the government has stepped in to find a new owner. This was officially announced by Minister Cho Seung-hwan of the Ministry of Oceans and Fisheries during a recent presidential briefing. It is the first time the government has publicly expressed its intention to privatize HMM.

The issue is not as simple as the government envisions. The significant rise in corporate value has rather become an obstacle to standing independently. Moreover, there are many high hurdles to overcome. We examine the challenges and solutions anticipated for the difficult privatization of HMM.

[Asia Economy Reporter Yoo Hyun-seok] Although the government has initiated the push for HMM privatization, the prevailing view in the market is that it will not be easy. As performance and financial stability have entered a stable phase, the government sees this as an opportune time to recover public funds. The saying "row when the tide comes in" applies here. However, due to a complex shareholding structure, governance risks, and the highly volatile shipping market, finding an appropriate buyer is expected to be challenging. The excessively high valuation is the biggest obstacle. During the Moon Jae-in administration, KDB Industrial Bank attempted a phased sale of HMM shares, but after the unprecedented shipping boom post-COVID-19, the stock price soared, causing the potential buyers to fail. 'HMM Standing Alone'

Due to concerns about a peak-out (downturn phase) in the shipping industry, HMM's stock price has recently been adjusted, and a difficult process is expected before the sale of HMM is finalized.

◆Government holds 70% stake... Difficult to find an appropriate valuation= The largest shareholder of HMM is KDB Industrial Bank, holding 20.69%. Following are Korea Ocean Business Corporation (KOBC) with 19.96%, SM Group with 5.52%, and Korea Credit Guarantee Fund with 5.02%. Based on the closing price of 23,650 won on the 18th, the share value of KDB Industrial Bank is 2.3934 trillion won, and KOBC is 2.308 trillion won, totaling over 4.8 trillion won. Especially, when including convertible bonds (CB) and bonds with warrants (BW) held by KDB Industrial Bank and KOBC, their stakes rise to 36.02% and 35.67%, respectively, exceeding 70% combined.

Given this shareholding structure, market evaluations are inevitably harsh. Although HMM has consecutively set record performances, converting the remaining outstanding bonds into shares would cause stock price dilution and only increase the government's shareholding ratio.

The government has acknowledged this and stated its intention to conduct a phased sale. The plan is to sequentially sell public shares of HMM and transfer management rights to the private sector. Minister Cho said, "If perpetual bonds are converted into shares, about 76% of the shares will be publicly owned, so the private sector would need a substantial amount to secure management rights later."

As a result, the industry expects the government will no longer convert perpetual bonds into shares. Conversion would increase the government's stake, burdening potential buyers. Also, stock dilution from conversion could provoke opposition from existing shareholders, which supports the preference for redeeming perpetual bonds. KDB Industrial Bank, tasked with recovering public funds, is also in a position where it cannot sell shares at a loss.

Choi Yoon-sung, HMM's Chief Strategy and Financial Officer, also stated in last month's mid-to-long-term strategy announcement, "Starting next year, we plan to treat the step-up (a clause that raises interest rates after a certain period) as maturity and exercise the redemption rights sequentially."

However, whether redemption is possible remains to be seen over time. Last year, HMM exercised early redemption rights on KOBC's 600 billion won CB, but KOBC refused and converted all into shares. Choi also refrained from commenting on whether KDB Industrial Bank and KOBC would accept early redemption, calling it a "policy institution decision."

◆Difficulties in finding a buyer= Although it is still early, Hyundai Motor Group, POSCO, and SM Group are consistently mentioned as potential buyers of HMM.

Hyundai Glovis focuses on bulk carriers and car carriers, while HMM specializes in container ships. Since their businesses overlap little, synergy is expected if the two companies merge. The fact that HMM President Kim Kyung-bae is from Hyundai Motor Group is also cited as a reason. However, industry analysis suggests it is difficult to predict Hyundai Motor Group's acquisition possibility, as it reportedly declined a government proposal to acquire HMM during its liquidity crisis in 2016. At that time, Hyundai Motor Group concluded that since Hyundai Glovis operates in shipping but in different business areas from HMM, acquisition lacked business viability and thus declined.

POSCO Group is in a similar situation. POSCO Holdings, the holding company launched in March this year, holds abundant cash assets of 5.7695 trillion won as of the first half of the year. Its recent intention to foster logistics also raises expectations for synergy. The market expects POSCO Holdings to actively court HMM.

SM Group is also in the spotlight. In June, SM Group acquired a 5.52% stake in HMM through its affiliates, becoming the third-largest shareholder after KDB Industrial Bank and KOBC. Since their business areas overlap, synergy is considered sufficient. SM Group Chairman Woo Oh-hyun has grown the company through mergers and acquisitions, leading to speculation that SM Group will enter the bidding. The problem is funding. SM Group lacks sufficient liquidity to acquire HMM, raising concerns that it would be a case of a shrimp swallowing a whale if it attempts the acquisition.

Experts emphasize the need for acquisition through a consortium of private companies. Professor Koo Kyo-hoon of the Department of International Trade and Logistics at Baewha Women's University explained, "Overseas, when acquiring a company, it is common for multiple companies to form a consortium to purchase shares, not just a single company. Since HMM is in the shipping industry, companies that can utilize this can form a consortium to acquire it, which is a good approach." He added, "This allows management not to be monopolized but to be checked by multiple companies, so the advantages outweigh the disadvantages."

◆Volatile shipping industry... Need for long-term growth drivers= Some argue that instead of immediately putting HMM on the market, its competitiveness should be further enhanced. Since the shipping industry is heavily influenced by economic cycles, a stable growth structure is necessary. The company needs to secure growth drivers through business diversification to become an attractive asset.

Recently, global shipping companies have been strengthening their business from 'port-to-port' to 'door-to-door.' Instead of just loading and unloading at ports, they are seeking to diversify into global project logistics companies covering customs clearance to inland transportation. Global carriers such as Swiss MSC, Danish Maersk, and French CMA-CGM are expanding not only their fleet capacity but also into land and air transportation. They are establishing dedicated cargo airlines or acquiring railway operators and logistics companies to become comprehensive logistics companies.

HMM recently announced a mid-to-long-term plan, but voices call for more aggressive business diversification. HMM plans to expand its fleet capacity to 1.2 million TEU by 2026 and increase its bulk fleet by 90% to 55 vessels (currently 29). It also announced plans to invest over 15 trillion won over five years from this year to 2026, focusing on core assets such as ships, terminals, and logistics facilities.

Professor Koo emphasized, "Global shipping companies are rapidly expanding into air and comprehensive logistics. Since focusing solely on shipping carries risks, HMM must show actual investment and action to resolve this."