[This Week's Gwan.Jong] Drifting HMM, the Future of Korea's Only National Shipping Company

HMM Sale Process Returns to Square One
Government Stake Grows to 74% with Perpetual Bond Conversion
Criticism Arises Over Missing 'Golden Time' as Shipping Market Declines

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With the collapse of the sale of container shipping company HMM, the management system under the Korea Development Bank (KDB) and the Korea Ocean Business Corporation (KOBC) will be maintained for the time being. Given the uncertain shipping market conditions, it is expected that KDB and KOBC will find it difficult to quickly proceed with a resale of HMM. The stock price, which surpassed 50,000 KRW in 2021, has now fallen below 20,000 KRW. After the bankruptcy of Hanjin Shipping, HMM remained the only domestic deep-sea container shipping company and accumulated massive profits during the shipping boom triggered by the COVID-19 pandemic. Riding on this, it seemed to be stepping out of the shadow of the government creditors through the sale process, but having failed to find a buyer, it has drifted again.

Causes of the Failed Sale and Its Impact on HMM

Harim Group, selected as the preferred bidder for HMM acquisition, was proactive enough to accept most of the demands from KDB and KOBC but ultimately failed in negotiations. The sale process, which began with a public announcement in July last year and lasted about seven months, has returned to square one. It also appears difficult to recover the trillions of won in public funds invested by the government for the time being. Criticism has arisen that the optimal timing for restructuring was missed. One of the negotiation issues was the restriction on the sale of shares held by private equity fund JKL Partners. JKL Partners, participating as Harim Group's partner in the acquisition, wanted to quickly sell its shares to recover funds after helping with financing. However, the creditors imposed a five-year ban on share sales as a contract condition, which became a stumbling block. Harim Group requested that JKL Partners be excluded from the sale ban, but this was not accepted. Although KDB proposed a mediation plan to reduce the period to three years, KOBC reportedly strongly rejected it. Harim Group also proposed acquiring HMM without JKL Partners, but this was not accepted.

The apparent cause of this failed sale was Harim Group's lack of financial strength and the inability to reconcile differences over the timing of fund recovery by the financial investor. The industry views a more fundamental cause as the conflict over government intervention in management rights. The differing positions of KDB, which wants to sell HMM quickly and recover public funds promptly, and KOBC, which wants to establish minimum safeguards from a public interest perspective, reportedly became obstacles in the negotiations.

KDB has stated it will soon start the resale process, but the industry believes that considering the recent uncertainty in the shipping market, it will be difficult to expect new buyers for the time being. The worsening shipping market conditions are an obstacle to resale. The shipping boom caused by COVID-19 ended, and freight rates began to fall sharply from the second half of last year. There are concerns that missing the right timing for sale and failing to establish fundamental strategies to overcome low freight rate competition could cause setbacks. Complex adverse factors surrounding HMM, such as global shipping alliance restructuring, labor union strikes, and geopolitical crises, are spreading a sense of crisis. There are also concerns that the unfortunate case of Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean), which lost competitiveness after spending over 20 years under government creditor management, could be repeated.

Some have reacted that the failed acquisition was fortunate. The saying that the shrimp (Harim) was trying to swallow the whale (HMM) reflects the large size of the target company. There were concerns about the "winner's curse." Worries arose that Harim's weak financial power would lead it to focus on repaying acquisition funds rather than enhancing HMM's future value. Harim would need to borrow over 4 trillion KRW out of the 6.4 trillion KRW acquisition price, raising concerns about its financing ability. Ultimately, some view that it was unrealistic for Harim Group, with about 1.6 trillion KRW in cash assets, to acquire HMM, which has assets worth 14 trillion KRW. The HMM labor union's opposition to the sale, fearing the possible use of 10 trillion KRW in reserves, aligns with this perspective. Although there are criticisms that the sale failed once and the opportunity to maximize the price was missed, the argument that a proper owner should be found since it is already late is gaining traction.

However, if the perpetual bonds held by KDB and KOBC are all converted into shares by next year, HMM's size will increase further, making it difficult for ordinary buyers to complete the sale. By next year, the government's stake in HMM will rise from the current 58% to 74% due to the conversion of perpetual bonds into shares. Based on Harim Group's attempt to acquire a 57.9% stake in HMM for 6.4 trillion KRW, a simple calculation values a 73.8% stake at about 8 trillion KRW. The market judges that it will become difficult for companies outside the top 10 domestic conglomerates to acquire HMM. However, the fact that price and acquisition conditions were specified during this sale negotiation process is hopeful. Since all conditions have been disclosed, if a company with the financial capability to accept them participates in the acquisition, trial and error can be reduced.

Shaking HMM... The Future of the Only Domestic Flagship Shipping Company

HMM is the largest domestic and the eighth-largest global container shipping company with global competitiveness. Looking at HMM's performance over the past three years, sales were 13.7941 trillion KRW in 2021, 18.5828 trillion KRW in 2022, and an estimated 8.4305 trillion KRW in 2023 (according to securities firms), showing rapid growth during the pandemic. Operating profit from 2020 to 2022 totaled 18.3099 trillion KRW. It became a cash-rich company so notable that it earned what it expects to make over the next ten years during this period.

As of the end of the third quarter last year, HMM held about 11.5 trillion KRW in cash and short-term financial instruments. The debt ratio, which was 557% at the end of 2019, improved significantly to 20.2%. It is also evaluated as having succeeded in improving its structure by proactively responding to environmental regulations. All of HMM's container ships comply with the International Maritime Organization's environmental regulations. The proportion of ultra-large vessels (over 10,000 TEU) is the highest in the world. Although freight rates fell across all routes in the third quarter last year, causing major global shipping companies to record losses and show weakness, HMM's operating profit margin of 3.6% is interpreted positively.

However, if the unstable state of uncertain sale timing prolongs, HMM may lose competitiveness to respond to changes in the shipping industry environment. HMM's global market share is still only 3.3%. The survival of container shipping companies depends on global shipping alliances and securing cargo owners. The alliance with Hapag-Lloyd, the world's fifth-largest shipping company from Germany, is scheduled to end next year, raising alarms about securing cargo from Europe. Regardless of changes in the largest shareholder, it is necessary to establish a system under professional management that can make appropriate investment decisions and strengthen shipping alliance activities.

Meanwhile, HMM plans to expand its shipping capacity to 1.2 million TEU by 2026 and increase its bulk fleet by 90% to 55 vessels (currently 29). It also plans to invest over 15 trillion KRW over five years from 2022 to 2026, focusing on core assets such as ships, terminals, and logistics facilities.