[Business & Issues] Hanwha Stock Shaken by Rights Offering Shock... The Reason for Reattempting Acquisition of Australia's Oztal

Securing Funds with a 3.6 Trillion KRW Capital Increase
Entry into U.S. Military Ship Market Possible Through Austal
Key Challenges: Persuading Management and Obtaining Australian Regulatory Approval

A U.S. Navy ship manufactured by Australian defense company Austal. Austal website

Hanwha Aerospace is conducting a paid-in capital increase worth 3.6 trillion KRW, the largest in the history of the Korean stock market, aiming to expand Hanwha Group's overseas defense bases, including a renewed attempt to acquire the Australian defense company Austal. The plan is to lay the groundwork for entering the U.S. naval ship market through Austal's subsidiary, 'Austal USA,' which supplies a large number of small military vessels to the U.S. Navy. However, as with Hanwha Group's first acquisition attempt last September, Austal's management opposes Hanwha's acquisition of management rights, and the Australian government is also taking a cautious stance, making the acquisition process appear challenging.

Hanwha Aerospace's Largest Ever Capital Increase... Securing Funds for Austal Share Purchase

Hanwha Aerospace announced on the 20th that it will conduct a paid-in capital increase worth 3.6 trillion KRW. The funds will be used for investments across the defense sector and securing overseas local defense bases. Approximately 800 billion KRW of this will be invested in securing shipbuilding and marine production bases, expected to be used for equity investment in Austal, the Australian defense company for which a renewed acquisition attempt has recently been launched.

Hanwha Group's Australian local subsidiary, ‘HAA No.1 PTY LTD,’ has already directly purchased a 9.9% stake in Austal through over-the-counter trading on the Australian Securities Exchange. ‘HAA No.1 PTY LTD’ is jointly owned by Hanwha Systems and Hanwha Aerospace in a 6:4 ratio. Through the capital increase, Hanwha Systems invested 202.7 billion KRW, and Hanwha Aerospace invested 64.2 billion KRW.

In addition to the 9.9% stake purchased via over-the-counter trading, a total return swap (TRS) contract has also been signed with a local Australian securities firm for another 9.9% stake in Austal. A TRS contract allows the securities firm to purchase shares on behalf of the investor by providing collateral, receiving the income generated from the shares as fees. Since the shares can be fully acquired after the contract period ends, this method is used to indirectly increase shareholding.

The reason Hanwha Group has adopted this complex share acquisition method is that it cannot directly control more than 10% of Austal's shares immediately. Austal is one of Australia's strategic defense companies. For national security reasons, foreign companies must obtain approval from the Australian Foreign Investment Review Board (FIRB) to directly control more than 10% of shares. Hanwha has applied for investment approval from FIRB to increase its stake in Austal to a total of 19.9%. After approval by Australian authorities, if the 9.9% stake secured through the TRS contract can be converted to direct ownership, Hanwha's stake in Austal will increase to 19.8%. This would surpass the current largest shareholder, Tatarang Ventures (17.09%), making Hanwha the largest shareholder.

Austal USA, No.1 in U.S. Small Military Support Ship Orders... Foundation for Entry into U.S. Naval Market

The Ostal USA shipyard, a subsidiary of Ostal in the United States. Ostal website

Hanwha's renewed attempt to acquire Austal following last September is interpreted as an effort to secure 'Austal USA.' Austal USA has shipyards in two locations: Mobile, Alabama, and San Diego, California, and primarily supplies small military vessels to the U.S. Navy. The Mobile shipyard mainly builds military ships, while the San Diego facility specializes in ship maintenance and repair (MRO).

Austal USA holds the number one market share in the U.S. military for small surface support ships and logistics support vessels, with an order backlog worth 14.2 billion AUD (approximately 13.14 trillion KRW). It specializes in producing small vessels operating in coastal areas, such as patrol boats and reconnaissance ships for the U.S. Navy and the U.S. Coast Guard (USCG).

The U.S. Navy follows the Jones Act, also known as the Cabotage Law, enacted in 1920. This law mandates that only ships built in the United States can be used for transportation between U.S. ports. Allied defense companies must also supply the U.S. military through local U.S. shipyards in compliance with this law.

Hanwha Group aims to enter the U.S. naval ship market and acquired Philly Shipyard in Philadelphia from the Norwegian company Aker in December last year. If the acquisition of Austal USA is successful, it will establish a solid foundation for Hanwha to actively enter the U.S. military ship market.

Persuading Management and Obtaining Regulatory Approvals Are Key... Australian Government Takes Cautious Stance

AFP·Yonhap News

However, obtaining approval from Austal's headquarters management and the Australian government is crucial. The first acquisition attempt last September failed due to opposition from Austal's management, and the Australian government remains cautious, suggesting difficulties in the acquisition process.

According to Australian media such as The West Australian, Austal's management believes Hanwha's acquisition of management rights will not be easy. Richard Spencer, Austal's chairman, said in an interview with local media, "It will be difficult for Hanwha to obtain approvals from both Australia's FIRB and the U.S. Committee on Foreign Investment in the United States (CFIUS)," adding, "The U.S. government manages access to classified military technology very carefully." Even if Hanwha obtains FIRB approval, it must also pass through the U.S. CFIUS and the Defense Counterintelligence and Security Agency (DCSA) to acquire Austal's management rights.

Meanwhile, the Australian government has not made any official statements regarding Hanwha's acquisition of Austal shares. In May last year, Richard Marles, Australia's Minister for Defence, stated regarding Hanwha's first acquisition attempt, "There are no particular concerns about the acquisition as long as a security agreement to protect sensitive technology is supported." However, in November of the same year, the Australian government designated Austal as a strategic defense company, making foreign share acquisitions more stringent.