The EU will restart its review of the merger of two major South Korean shipbuilders; results expected in 3 months!

Local time on June 3, the European Commission restarted its review of Hyundai Heavy Industries Group's acquisition of Daewoo Shipbuilding, which had been suspended due to the spread of the COVID-19 pandemic. The European Commission made the above statement on its official website that day, pointing out that the final deadline for the review results to be released is September 3 this year. This marked a ray of hope for the merger of the two South Korean shipbuilding giants.

Previously, affected by the spread of the COVID-19 pandemic, the European Commission encountered difficulties in collecting review-related data, and thus suspended the review from March 31 this year.

The merger was made public early, but the review process encountered obstacles and proceeded slowly.

In January 2019, Hyundai Heavy Industries Group announced an acquisition agreement with Daewoo Shipbuilding, which was the first "big deal" merger in the global shipbuilding industry to be made public. Senior executives of Hyundai Heavy Industries Group stated in March of that year that their goal was to complete the review by foreign agencies before the end of 2019.

As required, the merger and acquisition of Hyundai Heavy Industries Group and Daewoo Shipbuilding needs to pass the formal review of antitrust agencies in 6 countries and regions: the European Union, Singapore, South Korea, Japan, China, and Kazakhstan. As long as one of these countries or regions objects, the M&A plan will fall through. Although corporate merger reviews differ in various countries, antitrust agencies in each country impose reporting obligations on corporate mergers between companies that meet certain standards for sales, assets, market share, etc.

The South Korean shipbuilding industry believes that the South Korean antitrust agency, the Korea Fair Trade Commission, will certainly not make things difficult for "its own people." Therefore, obtaining approval from overseas antitrust agencies has always been considered the primary obstacle to this merger.

In July, August, and September 2019, South Korea submitted review applications to China, Kazakhstan, and Singapore, respectively, and preliminary reviews of the merger case in these three countries began immediately; in September 2019, Japan began its preliminary review; in December 2019, the EU also initiated an in-depth review of this corporate merger case.

Kazakhstan was the quickest country to act. In October 2019, its antitrust agency approved the corporate merger and acquisition case, making Kazakhstan the only country to date that has formally approved the M&A case.

The South Korean shipbuilding industry has always believed that the biggest challenge facing the merger of South Korea's two major shipbuilding companies is the EU, followed by Japan. However, before the EU and Japan "stated their positions," Singapore had already "raised difficulties." On November 29, 2019, the Competition and Consumer Commission of Singapore (CCCS) issued an announcement after completing its Phase 1 review, stating that based on information provided by Korea Shipbuilding & Offshore Engineering (KSOE) and feedback from third parties (including customers and other competing merchant vessel suppliers), the Commission has raised competition concerns regarding the proposed transaction to KSOE. The announcement stated: "Third-party feedback indicates that the two companies are currently the largest suppliers of liquefied natural gas (LNG) carriers globally, and potentially also the largest suppliers in the large container ship and large oil tanker sectors," and "there are concerns that the proposed transaction would eliminate competition between two major suppliers in the aforementioned merchant vessel sectors, thereby harming the interests of Singaporean customers."

The Competition and Consumer Commission of Singapore also stated that third-party feedback also indicated concerns about whether alternative suppliers would be strong enough to compete with the merged entity. Additionally, there were concerns that the merger would raise barriers to market entry and expansion, particularly in more advanced vessel sectors such as LNG carriers.

Besides Singapore's unclear stance, the EU and Japan also seemed unwilling to let this M&A case pass easily.

The Competition Directorate-General under the European Commission stated when embarking on an in-depth review of this merger case: "The corporate merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding may have negative impacts on increasing new shipbuilding prices, narrowing shipowners' choices, and reducing technological innovation, so we will make a cautious decision." "Regarding the corporate merger of the two companies, we will conduct an in-depth review before May 7."

The EU will primarily conduct a focused and in-depth investigation into Hyundai Heavy Industries Group and Daewoo Shipbuilding's market share in liquefied natural gas (LNG) carriers, among other areas, before announcing the review results.

It is understood that the European Commission originally planned to announce the results of the corporate merger review of Hyundai Heavy Industries Group and Daewoo Shipbuilding on July 9. However, with the outbreak and spread of the COVID-19 pandemic, on March 31, EU authorities temporarily suspended the review of Hyundai Heavy Industries Group's acquisition of Daewoo Shipbuilding, because the relevant companies, affected by the COVID-19 pandemic, delayed their responses to the EU's requests for information. The EU competition authority stated: "If there are omissions in the information provided by the relevant companies, the review clock will restart, and the Commission's decision deadline will be adjusted accordingly."

Does the EU review decide everything? Japan's attitude is ambiguous.

South Korean media commented on this, stating that the date of the EU's review results announcement will be the "biggest watershed" for the merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding. In other words, the review results to be announced by the EU in early September will determine the review results and schedules of other countries. As the EU's stance becomes clearer, the review results from other countries like Singapore and Japan will also be released sequentially.

South Korean shipbuilding industry experts pointed out that it is particularly noteworthy that Japan, which has expressed dissatisfaction with the South Korean government's shipbuilding industry restructuring policy, not only frequently resorts to the World Trade Organization (WTO) but also is very likely to heed the EU's opinion on the corporate merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding. It can be concluded that in the corporate merger review of Hyundai Heavy Industries Group and Daewoo Shipbuilding, the EU's decision is more important than Japan's, because Japan's WTO lawsuit will not have a significant impact on the merger of the two South Korean shipbuilding companies.

Previously, in November 2018, Japan first sued South Korea regarding the South Korean government's policy of injecting public funds to assist the restructuring of its shipbuilding industry, claiming that the use of public funds violated the WTO Agreement on Subsidies and Countervailing Measures. South Korean industry insiders stated that the most crucial factor in the current merger review case of Hyundai Heavy Industries Group and Daewoo Shipbuilding is still the EU's review results, and Japan's lawsuit filed with the WTO will only have a negligible effect on the merger review.

Relevant individuals in the South Korean shipbuilding industry stated: "The EU's review results will determine the outcomes for other countries such as Singapore and Japan."

Japan's attitude, however, is quite unpredictable. The Japan Fair Trade Commission officially accepted the application for approval of the corporate merger between Hyundai Heavy Industries Group and Daewoo Shipbuilding on February 25 this year. This was 5 months after Japan began its preliminary review in September 2019.

In January this year, Japan's Ministry of Land, Infrastructure, Transport and Tourism expressed dissatisfaction with the South Korean government's support policies for the merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding and filed a lawsuit with the World Trade Organization (WTO), but the formal review of the two companies' merger continued as scheduled.

On March 19, the Japan Fair Trade Commission began the second round of its formal review of the corporate merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding. Unlike the antitrust agencies in the EU and Singapore, Japan entered the second round of review just three weeks after starting the first round on February 25.

On January 31 this year, when Japan filed a complaint with the World Trade Organization (WTO) against the South Korean government's shipbuilding industry restructuring policy, some in the South Korean industry feared it would affect the review of the merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding & Marine Engineering. However, the Japanese antitrust agency pledged to conduct a fair review. Coupled with the faster review process compared to the EU and Singapore, this led to a surge of hope within the South Korean industry.

The Japan Fair Trade Commission stated that it would conduct a thorough investigation into mergers and acquisitions that affect competition in the domestic market. In particular, the Shipbuilders' Association of Japan (SAJ), representing the interests of Japanese shipbuilding companies, opposed Hyundai Heavy Industries Group's acquisition of Daewoo Shipbuilding & Marine Engineering, deeming it "a violation of market order" and requiring careful consideration. Japanese shipbuilding companies fear that the merger of Hyundai Heavy Industries Group and Daewoo Shipbuilding & Marine Engineering will lead to domestic shipbuilders being squeezed out of competition based on economies of scale, further reducing their market share. Japan stated that while the second round of review has begun, the specific timeline is undetermined.

Singapore's antitrust agency also failed to reach a conclusion in the first round of review of the merger and is currently conducting a second round of review.

Currently, the sluggish global shipping and shipbuilding market shows no signs of significant improvement, and the widespread COVID-19 pandemic has essentially put a hold on numerous economic activities. However, for Hyundai Heavy Industries Group, the merger with Daewoo Shipbuilding & Marine Engineering is more urgent than anything else. On March 24 this year, Mr. Ga San-hyun was appointed as the representative director of Korea Shipbuilding & Offshore Engineering, the intermediate holding company responsible for the shipbuilding business of the group. South Korean industry insiders commented: "Mr. Ga San-hyun has been entrusted with the mission of completing the acquisition of Daewoo Shipbuilding & Marine Engineering and solidifying Hyundai Heavy Industries Group's position as a world-leading shipbuilding group."

If all the merger reviews by various countries and regions are passed, Korea Shipbuilding & Offshore Engineering and Korea Development Bank will exchange their shares in Korea Shipbuilding & Offshore Engineering and Daewoo Shipbuilding & Marine Engineering, concluding the acquisition process of Daewoo Shipbuilding & Marine Engineering.

Hyundai Heavy Industries Group signed a formal contract to acquire Daewoo Shipbuilding & Marine Engineering in March last year. Following the procedure, the existing Hyundai Heavy Industries was split into Korea Shipbuilding & Offshore Engineering (the surviving entity) and Hyundai Heavy Industries (a newly established entity) through a physical division. (Wang Chu)