[Q&A] Kang Seok-hoon, Chairman of KDB, "Finding a Private Owner for Daewoo Shipbuilding Minimizes National Loss" Refutes Undervaluation Controversy

Kang Seok-hoon, Chairman of the Korea Development Bank, is speaking at an emergency press conference regarding current issues at Daewoo Shipbuilding, held on the 26th at the Korea Development Bank headquarters in Yeouido, Seoul. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Bu Aeri] KDB Industrial Bank announced on the 26th that as part of the strategic investment attraction process for the normalization of Daewoo Shipbuilding & Marine Engineering (DSME), Hanwha Group and DSME signed a conditional investment agreement (MOU) including a third-party allotment capital increase plan worth 2 trillion KRW.

Kang Seok-hoon, Chairman of KDB Industrial Bank, said at the bank's headquarters in Yeouido, Seoul on the 26th, "If Hanwha Group is selected as the final acquirer, Hanwha Group plans to secure management rights of DSME through a capital increase of 2 trillion KRW," adding, "With the emergence of a private major shareholder, we expect qualitative growth of the domestic shipbuilding industry through bold research and development (R&D) investments, and the competitiveness of Korea's shipbuilding industry will be further strengthened."

Regarding the controversy over the low-price sale, Chairman Kang emphasized, "Although KDB Industrial Bank has been the major shareholder of DSME for 21 years, the corporate value has continuously declined since the insolvency in 2015," and added, "We judged that finding a private owner to normalize the company is the way to minimize the loss to the public."

▶Below is the Q&A with Chairman Kang

▲Looking at the sale method, it is expected that the Big 3 system will be maintained. There has been an issue of order price decline due to excessive competition in the shipbuilding business. Will the sale to Hanwha resolve the order price decline issue?

=The merger with Hyundai Heavy Industries has failed, making it practically impossible for Hyundai Heavy Industries and Samsung Heavy Industries to acquire DSME. The only way was for a third strategic investor to resolve the M&A issue. There have been controversies over low-price orders, and partly because DSME was supported by KDB Industrial Bank, such phenomena occurred. Now that a private major shareholder will manage the company, the order price decline issue is expected to be relatively reduced, and it is hoped to be a turning point for higher quality and profit improvement in the shipbuilding industry.

▲What is the plan for recovering the public funds invested by KDB Industrial Bank?

=Public funds refer to funds raised based on bonds issued by the Korea Deposit Insurance Corporation and Korea Asset Management Corporation. The support from KDB Industrial Bank is not legally considered public fund injection. Currently, KDB Industrial Bank has invested 2.6 trillion KRW in new funds, and there was a primary capital conversion of 1.8 trillion KRW. In March 2017, a secondary credit line of 1.45 trillion KRW was added, and a capital conversion of 300 billion KRW occurred. Adding all these, including the credit line, the total new funds amount to 4.1 trillion KRW. Currently, KDB Industrial Bank estimates a loss of 3.5 trillion KRW, of which 1.6 trillion KRW is reserved for bad debts and 1.8 trillion KRW is stock impairment. If DSME is classified as a normal credit in the future, 1.6 trillion KRW will be reversed as profit, and if the stock price rises, a significant portion of the invested amount is expected to be recovered.

▲You mentioned 2 trillion KRW; what is the specific calculation basis? Is there a penalty for non-performance?

=There are various specific formulas, including past one-month weighted average price, one-week weighted average price, and recent weighted average price. The final price for this capital increase was fixed at 19,150 KRW per share. If Hanwha Group invests 2 trillion KRW, Hanwha will hold 48.3% of shares, and KDB Industrial Bank will hold 28.2%. There is no clause for penalty for non-performance, but one or two provisions allow the contract to be voided if it is not properly executed.

▲Criticism over low-price sale seems inevitable. I understand that KDB Industrial Bank prefers a full sale. Did Hanwha agree to this willingly?

=The announcement was that Hanwha Group was selected as the stalking horse (final acquirer through competitive bidding). Hanwha is currently the preferred negotiation partner, and they will wait for companies that can offer better proposals within a certain period. If a company offers better conditions than Hanwha, a contract can be made with that company. The current status is that Hanwha is the preferred negotiation partner, not the final acquirer. Regarding the low-price sale, this plan is judged to minimize the public loss. KDB Industrial Bank has been the major shareholder of DSME for 21 years, but since the insolvency in 2015, corporate value has continuously declined. The company is in a difficult situation, having incurred losses of 1.7 trillion KRW last year and 600 billion KRW in the first half of this year. Finding a private owner to normalize the company is judged to minimize public loss. There is no compensation for Hanwha from the full sale.

▲Besides Hanwha Group, which other private companies were approached? Did you share any opinions separately with Chairman Kim Seung-yeon of Hanwha?

=We approached most large conglomerates engaged in manufacturing. We contacted all possible groups in Korea. It is inappropriate to disclose specific details of the deal with Chairman Kim. However, we confirmed that Hanwha Group has the intention and willingness to acquire through various methods.

▲If the sale to Hanwha Group is completed, there are concerns that restructuring for management efficiency is inevitable. The labor union is expected to oppose this. How far have negotiations progressed?

=If Hanwha Group's acquisition is confirmed, various management efficiency measures will be taken. Since Hanwha has extensive related experience with DSME, there may be mutual support in management efficiency. However, under the management rights sale, the party responsible for strengthening management efficiency is Hanwha.

▲Are there any issues with overseas competition authority approvals? There is an investment priority right; what are the specific future procedures?

=It is expected that general corporate merger reviews will be conducted by about 10 countries' overseas competition authorities. Since Hanwha does not have a shipbuilding portfolio, the corporate merger issues are expected to be relatively minor. From tomorrow, letters of intent (LOI) will be accepted for three weeks. If there are companies interested in acquisition, due diligence will be conducted, which takes about four weeks and may be extended by two weeks if necessary.

▲Why was it decided to maintain financial support for five years even after the deal is closed?

=It is expected that some time will be needed until normalization. This support is intended to enhance DSME's sustainability and increase the possibility of KDB Industrial Bank recovering its bonds and stock prices, so it was decided to continue for five more years.

▲Can overseas companies participate?

=Basically, it is difficult for overseas companies to be the sole acquirer. National core technologies and defense industry technologies are heavily involved. Bidders led by overseas entities will not be qualified. Since the possibility of deal closure with Hyundai Heavy Industries and Samsung Heavy Industries is uncertain, those two companies will not participate either. However, Korean companies leading the bid with foreign capital involvement will be allowed.

▲Will KDB Industrial Bank be involved in replacing DSME's management?

=We will respect Hanwha Group's intentions to manage responsibly. However, since KDB Industrial Bank's stake will reach 28.2% if the current process continues, we are seriously considering dispatching outside directors.

▲If Hanwha ultimately acquires DSME and decides to conduct large-scale restructuring of workers, will you respect their decision?

=It is not appropriate to answer based on hypothetical situations. According to the press release distributed by Hanwha Group today, they plan to coexist with local communities and maintain continuous cooperative relationships with subcontractors and local industries. Considering these conditions, we believe the matter will be handled well.

▲What is the target completion date for the deal?

=It depends on whether other bidders come forward. We aim to sign the main contract within this year. Even after the main contract, legal procedures are required, and deal closing will take time, but we expect the deal to close by the first half of next year at the latest.