New Delay for Korea’s Mega Shipyard Merger Raises Doubts

Faced with its latest deadline to proceed with the proposed acquisition of Daewoo Shipbuilding & Marine Engineering (DSME), Hyundai Heavy Industries announced in a regulatory filing today that it has further extended its agreement with the Korea Development Bank, DSME's largest shareholder. The fourth extension of the deadlines comes as the companies continue to wait for regulatory approval, but increasingly there are questions if the merger will be completed.

First announced in March 2019, the merger of Hyundai Heavy Industries and DSME was positioned as both an opportunity to strengthen DSME and create a larger entity better able to compete with Chinese shipbuilders. DSME has been under financial pressure for years exasperated by increasing competition and a slowing of shipbuilding in the years leading up to the agreement. The Hyundai group formed Korea Shipbuilding & Offshore Engineering (KSOE) to serve as the parent company managing the three existing Hyundai shipyards and ultimately DSME after the acquisition. The combination would create the world’s largest shipbuilding company with approximately a quarter of the newbuilding market.

HHI and KDB previously had three times extended the deadlines for the transaction with the last agreement being January 2021 to delay the deadline to June 30 and the deadline for the acquisition of the shares to the end of 2021. Under the new agreement, the deadline for the transaction was delayed three months, but the filing warns that it could be revised.

The companies continue to cite a longer than expected review process by regulators and specifically the European Union, which has expressed concern that the combination might create a monopoly in segments of the market including LNG and LPG carriers. The EU announced that it would require a more extensive review, but the process has been paused on three separate occasions, largely blamed on delays due to the pandemic. 

In addition to the EU approval, the transaction still requires approval from Japanese regulators. Korea’s antitrust regulators are believed to be waiting for the EU approval before signing off on the combination. Regulators in China, Singapore, and Kazakhstan approved the merger.

The delays in closing the transaction and the strong upturn in the shipbuilding market in 2021, are however raising questions if the merger will be completed or if the new strength in the market might permit DSME to recover and proceed independently.  Analysts point to the strong growth in the orderbooks of the major shipyards highlighting that the Korean shipbuilders have already received nearly three-quarters of their 2021 targets in the first six months of the year.

The Korea Times news outlet cites strong opposition also coming from local officials. The newspaper quotes the local mayors saying, "The shipbuilding industry is entering a super cycle. The Korean government decided to sell DSME as the industry fell into a recession, but since it is starting to recover it needs to reassess DSME issues." 

Also contributing to the positive outlook for the Korean shipbuilders is an announcement this week by Korea’s president Moon Jae-in of a new program to expand Korea’s shipping industry. Speaking at the dedication of HMM’s newest containership that is the last vessel under the government’s previous five-year recovery plan, the president said they would establish a new $300 million fund to support the development of green shipping and would support HMM and others in expanding their fleets. The goal for the container shipping segment is to double capacity and revenues by 2030.

For their part, officials from both KSOE and DSME continue to express their strong belief in the transaction and the ability to increase Korea’s global competitiveness in shipbuilding.