US$1.4 billion sold as a package! Daewoo Shipbuilding welcomes a new owner.

After 22 years, Daewoo Shipbuilding & Marine Engineering, one of South Korea's three shipbuilding giants, has a new owner. Following the failure of its merger with Hyundai Heavy Industries Group, South Korea's largest shipbuilder, earlier this year, Daewoo Shipbuilding is expected to be sold to South Korean defense contractor Hanwha Group for \$1.4 billion.

The South Korean government urgently passed a bill to extend the existing financial support plan for five years.

On the morning of September 26, South Korea's Ministry of Economy and Finance, Ministry of Trade, Industry and Energy, and Financial Services Commission held an urgent ministerial meeting on improving industrial competitiveness to discuss the sale of Daewoo Shipbuilding. Kang Seok-hoon, chairman and CEO of the Korea Development Bank (KDB), proposed selling Daewoo Shipbuilding to Hanwha Group, which was approved by the government.

Later that afternoon, the KDB held a board meeting, and Daewoo Shipbuilding and Hanwha Group signed a conditional investment agreement (MOU) that includes a 2 trillion won (approximately \$1.406 billion) paid-in capital increase plan. According to this agreement, Hanwha Group will acquire a 49.3% stake in Daewoo Shipbuilding & Marine Engineering and gain management control through a 2 trillion won (approximately 10 billion RMB) paid-in capital increase. Companies participating in the paid-in capital increase include Hanwha Aerospace (1 trillion won), Hanwha Systems (500 billion won), Hanwha Impact Partners (400 billion won), and three subsidiaries of Hanwha Energy (100 billion won).

The Korea Development Bank and the Export-Import Bank of Korea plan to extend their existing financial support plan for Daewoo Shipbuilding by five years, particularly changing the terms of the KDB's perpetual convertible bonds (CBs). Currently, the KDB holds 2.33 trillion won in perpetual bonds of Daewoo Shipbuilding. If Daewoo Shipbuilding cannot repay the principal, the current annual interest rate of 1% could rise to over 10%. In other words, to ensure a stable sale of Daewoo Shipbuilding, the KDB must prevent this from happening.

KDB Chairman Kang Seok-hoon explained the background of the sale of Daewoo Shipbuilding that day: "After the failure of Hyundai Heavy Industries Group's acquisition of Daewoo Shipbuilding in January this year, we conducted a management consultation. The results showed that under the current level of competitiveness and market environment, it is unlikely that Daewoo Shipbuilding can achieve operational normalization on its own."

Therefore, the KDB decided to work with Daewoo Shipbuilding's creditor group to develop a support plan aimed at successfully attracting investment and normalizing Daewoo Shipbuilding's operations.

After signing the investment agreement with Hanwha Group, a bidding process for Daewoo Shipbuilding shares will be conducted according to the stalking horse procedure to provide opportunities for investors who can offer more favorable conditions than Hanwha Group.

The KDB stated: "The final investor will be determined based on the bidding conditions of subsequent bidders and whether Hanwha Group exercises its preemptive right."

Kang Seok-hoon said: "The results of discussions with Hanwha Group show that Daewoo Shipbuilding and Hanwha Group have signed a conditional investment agreement, and then decided to use the stalking horse method to determine the final investor through bidding." He also said: "Daewoo Shipbuilding expects to attract investment to increase its capital by 2 trillion won, address future funding shortages, and secure investment resources for future growth."

From "partial sale" to "complete sale," Daewoo Shipbuilding ushers in a new era.

According to International Shipbuilding Network, Daewoo Shipbuilding was originally founded in 1973 and merged into Daewoo Heavy Industries in 1994. After the bankruptcy and disintegration of the Daewoo Group at the end of 1999, Daewoo Shipbuilding was established in 2000 based on the shipbuilding business separated from Daewoo Heavy Industries. It then underwent debt restructuring, and in 2001, after completing debt restructuring, it was taken over by the KDB for management and privatization. Since then, Daewoo Shipbuilding has been under the management of a creditor group led by the KDB for 22 consecutive years, with the KDB holding 55.7% of Daewoo Shipbuilding's shares as the controlling shareholder.

Daewoo Shipbuilding attempted to sell itself to Hanwha Group and Hyundai Heavy Industries Group in 2008 and this year, respectively, but both attempts ultimately failed.

This year, a strike by Daewoo Shipbuilding's subcontractor union at the Geoje Island shipyard plunged Daewoo Shipbuilding into a deeper crisis. However, Hanwha's attempt to acquire Daewoo Shipbuilding is expected to succeed, and Daewoo Shipbuilding is expected to accelerate its return to normal operations.

Due to the failure to normalize Daewoo Shipbuilding's operations and the repeated setbacks in its sale, calls for an end to the "KDB creditor group management system" have grown louder. In response, a senior government official explained that if the bankruptcy of Daewoo Shipbuilding, as proposed by some, were to become a reality, tens of thousands of jobs would be lost, and the shipbuilding industry, a pillar of the South Korean economy, would inevitably suffer a severe blow. Furthermore, it could trigger social controversy, making liquidation highly unlikely. The KDB only stated its position in principle: "We plan to make a decision after analyzing the results of external professional consultations on Daewoo Shipbuilding."

In other words, although Daewoo Shipbuilding has continuously received a large number of new ship orders since last year, there is a consensus that the company's "state-owned enterprise" system under the KDB creditor group is unsustainable. It is observed that if the privatization of Daewoo Shipbuilding is delayed, due to the "bleeding" low-price competition among South Korea's three major shipbuilders, the South Korean industry has developed a sense of crisis that the domestic shipbuilding industry could collapse if it is not careful.

Previously, the South Korean government discussed a plan to split and sell Daewoo Shipbuilding's military and commercial shipbuilding businesses. It is understood that the government believes that although it has invested a total of 11.8 trillion won (approximately \$9 billion) in public funds in Daewoo Shipbuilding over the years, the company's losses continue to expand, making it difficult to sell it as a whole. South Korean industry insiders believe that this move is intended to reduce the scale of Daewoo Shipbuilding's sale and increase the likelihood of its privatization.

However, there has been opposition from across the political spectrum and the industry in South Korea regarding the sale of Daewoo Shipbuilding, with many opposing a split sale. South Korean industry insiders say that Daewoo Shipbuilding not only builds ordinary commercial ships but also builds surface warships and submarines. Splitting up Daewoo Shipbuilding would reduce the company's operational efficiency because the military and commercial shipbuilding divisions within Daewoo Shipbuilding are not separate businesses but rather complement each other. The processing and construction sites within the shipyard are also difficult to split into two completely different businesses structurally, and many supporting departments, such as the supply of raw materials for ship construction, handle business at one location.

Many in the South Korean political arena also believe that the sale of Daewoo Shipbuilding must be premised on revitalizing the regional economy and achieving national development through the growth of the shipbuilding industry, making a complete sale the better option. From this perspective, this complete sale is a welcome decision.

Hanwha Group, which attempted an acquisition 14 years ago, will see synergies in the defense and LNG sectors.

It is worth mentioning that Hanwha Group attempted to acquire Daewoo Shipbuilding & Marine Engineering for 6 trillion won in 2008, hoping for synergy with its defense industry sector. However, due to opposition from some members of Daewoo Shipbuilding & Marine Engineering and difficulties in securing funds due to the global financial crisis at the time, Hanwha Group ultimately abandoned the acquisition plan.

Hanwha's renewed push to acquire Daewoo Shipbuilding & Marine Engineering after 14 years is driven by the expectation of synergy in the defense industry. Recently, Hanwha announced that it would integrate its defense industries, currently spread across Hanwha Corporation's defense sector, Hanwha Aerospace, and Hanwha Defense, into Hanwha Aerospace. Through this acquisition and merger, Hanwha Aerospace aims to become one of the "top ten global defense companies" by 2030. According to industry sources, "Hanwha views the defense industry as a new growth engine for the group and is actively investing." "It is understood that Hanwha's strategy is to acquire Daewoo Shipbuilding & Marine Engineering, which undertakes special shipbuilding projects such as submarines, to further expand its business areas."

Relevant personnel in the South Korean shipbuilding industry stated: "Hanwha Group has accelerated its development in the defense industry in recent years, achieving excellent results. Therefore, considering the synergy with Daewoo Shipbuilding & Marine Engineering's defense business, Hanwha Group quickly became a leading candidate to acquire Daewoo Shipbuilding & Marine Engineering in the market. The complete sale of Daewoo Shipbuilding & Marine Engineering to Hanwha Group is a good thing, and the synergy created between the two is also anticipated."

Meanwhile, as the global energy sector transitions to a hydrogen-based economy, Hanwha Group is expected to achieve synergy with Daewoo Shipbuilding & Marine Engineering in the LNG sector. Currently, Hanwha Group has established a business structure that imports LNG from the United States and generates electricity through Tongyeong Eco Power. Hanwha Group expects that by adding Daewoo Shipbuilding & Marine Engineering's floating liquefied natural gas (FLNG) and LNG floating storage regasification unit (LNG-FSRU) technologies, it will cover the entire industrial chain in the rapidly growing LNG market.

Relevant personnel in the South Korean industry stated: "Daewoo Shipbuilding & Marine Engineering's LNG transportation technology, combined with the strength of Hanwha Solutions and other subsidiaries under Hanwha Group, can build an LNG business value chain connecting 'production-transportation-power generation.' In addition, Daewoo Shipbuilding & Marine Engineering can utilize its competitive wind turbine installation vessel (WTIV), Hanwha Solutions can enter the US and European markets, and Hanwha Construction can enter the domestic offshore wind power market."

The acquisition of Daewoo Shipbuilding & Marine Engineering by Hanwha Group will accelerate the normalization of Daewoo Shipbuilding & Marine Engineering's operations, which has been under creditor management for 23 years since the breakup of the Daewoo Group in 2000, suffering from being a "company without an owner." Based on Hanwha Group's comprehensive investment support, Daewoo Shipbuilding & Marine Engineering's development of environmentally friendly ships will also become more flexible, and it is expected to participate more actively in global order competition.

Hanwha Group emphasized that this acquisition of Daewoo Shipbuilding & Marine Engineering is not merely a means of profit creation, but also embodies the will to "undertake the role of a key player in the nation's infrastructure." Hanwha Group will achieve a win-win goal with the Geoje community where Daewoo Shipbuilding & Marine Engineering is located through measures such as expanding investment, increasing employment, and expanding exports. At the same time, Hanwha Group plans to establish sustainable partnerships with local industries such as ship equipment supporting companies and partner companies (subcontractors).

A Hanwha Group official stated: "This acquisition will not only maximize the group's business synergy but will also actively promote the 'spirit of serving the nation through business' by investing in the nation's infrastructure and never neglecting the social responsibility of a large enterprise. The group will build a reasonable labor-management relationship based on trust through active dialogue with the labor union." (Wang Chu)