Hanwha Group Participates in Daewoo Shipbuilding's 2 Trillion KRW Capital Increase for M&A

'M&A by "Stalking Horse" Method... Hanwha Group May Exercise Investment Priority Rights'

[Image source=Yonhap News]

[Asia Economy Reporters Yu Je-hoon and Bu Ae-ri] KDB Industrial Bank announced on the 26th that it has signed a conditional investment agreement (MOU) with Hanwha Group and Daewoo Shipbuilding & Marine Engineering (DSME), including a third-party allotment capital increase plan worth approximately 2 trillion KRW, as part of the strategic investment attraction process to normalize DSME.

DSME's sale attempts have failed several times over the past 20 years. Accordingly, DSME has been working on management normalization through autonomous support from creditors, and since 2019, it pursued a merger and acquisition (M&A) with Hyundai Heavy Industries Group, but the effort was thwarted by the European Union (EU) competition authority's decision to disapprove the corporate merger.

After the failed sale, DSME has been conducting management consulting to strengthen competitiveness. However, due to the volatile nature of the shipbuilding industry, KDB Industrial Bank judged that it is urgent to attract external investors and improve the financial structure through large-scale capital expansion to ensure stable business operations and new business capabilities. Therefore, the bank decided to proceed with a capital increase by new share subscription, which can be quickly implemented while minimizing social and economic costs under the current circumstances. Consequently, DSME signed an MOU with Hanwha Group on the same day for strategic investment attraction.

According to this agreement, Hanwha Group will conduct a third-party allotment capital increase worth about 2 trillion KRW targeting DSME, acquiring 49.3% of DSME's shares and management rights. Hanwha affiliates participating include Hanwha Aerospace (1 trillion KRW), Hanwha Systems (500 billion KRW), Hanwha Impact Partners (400 billion KRW), and Hanwha Energy (100 billion KRW).

Additionally, KDB Industrial Bank, which will become the second-largest shareholder (28.2%) of DSME, will prepare support measures for DSME's management normalization together with the creditor group. The bank, along with Korea Eximbank, will maintain various financial supports such as loans, refund guarantees (RG), letters of credit (LC), and credit lines for five years from the transaction closing date, and will also revise the terms of Korea Eximbank's perpetual bonds.

DSME will also conduct a competitive bidding process using the 'Stalking Horse' method after signing the MOU with Hanwha Group to provide opportunities for investors offering more favorable conditions. The Stalking Horse method refers to a process where a restructuring company signs a conditional acquisition agreement with a prospective buyer based on public bidding. The final investor will be determined depending on the bidding conditions of subsequent participants and whether Hanwha Group exercises its right of first refusal.

Accordingly, KDB Industrial Bank will announce the competitive bidding on the 27th, accept letters of intent for about three weeks until the 17th of next month, conduct due diligence for up to six weeks, select the final investor, and sign the main contract (new share subscription agreement). Hanwha Group can exercise investment priority rights as the preferred negotiation partner at this stage. The selected final investor will complete the capital increase and close the transaction after obtaining related domestic and international approvals such as corporate merger and defense industry permits.

KDB Industrial Bank stated, "We hope this investment attraction process will successfully conclude and dramatically improve DSME's financial and operational capabilities. Furthermore, we expect that a capable and responsible private major shareholder will contribute to the development of the domestic shipbuilding industry through bold investments." The bank added, "We will do our best to ensure smooth progress of future procedures in consultation with DSME and the government."