Countdown! Hanwha Group's acquisition of Daewoo Shipbuilding removes "stumbling blocks"

Despite strong union opposition and significant losses from drillships, Hanwha Group's acquisition of Daewoo Shipbuilding & Marine Engineering is virtually certain after the successful completion of on-site investigations and other procedures. The official acquisition contract is expected to be signed this year.

According to sources in the South Korean industry, since the signing of a conditional investment agreement (MOU) on September 26th between Daewoo Shipbuilding's largest shareholder, the Korea Development Bank (KDB), and Hanwha Group, including a 2 trillion won (approximately US\$1.406 billion) paid-in capital increase plan, Hanwha Group has conducted a detailed on-site investigation and price negotiation of Daewoo Shipbuilding & Marine Engineering independently since October 18th to complete the acquisition process.

After a thorough on-site investigation, Hanwha Group's acquisition team stated that no contingent liabilities or other issues were found that could jeopardize the acquisition negotiations. Therefore, the team will submit the findings to the group for final discussion, and the official acquisition contract is expected to be signed as early as early December.

A source from the acquisition team said, "The on-site investigation, which began on October 18th, lasted up to 6 weeks. By November 28th, the acquisition team had completed the investigation and found no particularly worrisome unexpected changes."

Previously, some South Korean media reported that Hanwha Group's acquisition of Daewoo Shipbuilding & Marine Engineering might be delayed or even canceled. This is because the Daewoo Shipbuilding & Marine Engineering union accused the acquisition of being a unilateral low-price sale that excluded the parties involved. If Hanwha Group does not commit to "full employment" guarantees, the union will take strong measures, including obstructing due diligence. Meanwhile, the acquisition team discovered that Daewoo Shipbuilding & Marine Engineering had US\$200 million in contingent liabilities due to inventory drillships.

It is understood that as of October 17th, no letters of intent (LOI) were received from other potential investors (acquisition candidates) in the bidding for Daewoo Shipbuilding & Marine Engineering shares under the stalking horse bidding procedure. This means that with no additional acquisition candidates emerging, Hanwha Group has become the sole acquirer of Daewoo Shipbuilding & Marine Engineering. Subsequently, Hanwha Group formed an acquisition team led by Jeong Insub, president of Hanwha Energy, to conduct an on-site investigation. On November 15th, President Jeong Insub met with the Daewoo Shipbuilding & Marine Engineering union, expressing acceptance of the union's demands for employment guarantees and the inheritance of labor-management negotiations, and promising to ensure the union's participation in the signing of the formal acquisition contract. The union stated, "Based on the principle of mutual trust, the union believes in Hanwha Group's sincerity and has made the significant decision not to obstruct the on-site investigation." On November 16th, the acquisition team successfully conducted an on-site investigation at the Okpo shipyard.

In addition, the price Hanwha Group offered for the acquisition of Daewoo Shipbuilding & Marine Engineering is 2 trillion won. Although this is significantly lower than the 6 trillion won it attempted to invest in 2008 to acquire Daewoo Shipbuilding & Marine Engineering, the company's fragile financial structure and contingent liabilities such as large-scale perpetual bonds and drillship inventories remain a concern. Therefore, the investment agreement stipulates that if contingent liabilities exceeding 1 trillion won are discovered during the investigation, the contract can be terminated.

It is understood that between 2013 and 2016, Daewoo Shipbuilding & Marine Engineering suffered a major setback in the offshore equipment sector, resulting in significant economic losses, a substantial weakening of the company's strength, and a deterioration in performance. From 2012 to 2016, the company suffered significant losses for five consecutive years, with an average annual operating loss of 11 trillion won (approximately US\$8.9 billion). Its cash flow severely deteriorated, and its poor financial structure became even more apparent during the company's restructuring efforts, bringing it to the brink of bankruptcy.

To alleviate its liquidity pressure, Daewoo Shipbuilding & Marine Engineering had to sell two canceled drillships, the West Aquila and West Libra, at half price to Northern Drilling, an offshore drilling company owned by Norwegian shipping magnate John Fredriksen, in 2018. In 2019, it sold the Cobalt Explorer at half price to Northern Drilling. In October 2019, Northern Drilling decided to cancel the resale contract for the West Cobalt and demanded that Daewoo Shipbuilding & Marine Engineering return the approximately US\$49.2 million advance payment, plus interest and compensation. Northern Drilling stated at the time that the decision to cancel the contract was due to various reasons, including Daewoo Shipbuilding & Marine Engineering's material breach of contract. On August 17th last year, Northern Drilling announced the cancellation of the resale contract for the West Aquila; on October 16th last year, Northern Drilling announced the cancellation of the resale contract for the West Libra, citing reasons such as delayed delivery and breach of contract. At the same time, Northern Drilling also demanded that Daewoo Shipbuilding & Marine Engineering return the payments made and pay interest and damages. In response, a source from Daewoo Shipbuilding & Marine Engineering stated that it has filed a counterclaim against the shipowner, demanding compensation of 111.5 billion won (approximately US\$93 million).

On November 17th this year, offshore drilling company Transocean announced that its subsidiary, together with funds managed by Perestroika A.S. and Lime Rock Management, had formed a joint venture, Liquila Ventures. This joint venture has reached an agreement with Daewoo Shipbuilding & Marine Engineering to acquire the West Aquila for approximately US\$200 million. A source from Daewoo Shipbuilding & Marine Engineering stated that the company currently has five "inventory" drillships. With the successful resale of the West Aquila, the impending resale of the West Libra and Cobalt Explorer, and the fact that 70% of the payment has been received for two other drillships from Valaris, the world's largest offshore drilling company, no further losses are expected.

The South Korean industry believes that with Hanwha Group successfully resolving the risks of union obstruction and contingent liabilities from drillships, which were considered the biggest obstacles to the acquisition, the acquisition process will proceed smoothly. Hanwha Group expects to sign the formal acquisition contract in December this year and complete all acquisition procedures after the corporate merger review by relevant national antitrust regulatory agencies in the first half of next year.

A source from Hanwha Group stated, "Over the past six weeks, the group has made every effort to understand the current situation of Daewoo Shipbuilding & Marine Engineering and is currently conducting a comprehensive discussion. The group will continue to proceed with the necessary procedures based on the final results of the on-site investigation."