Preliminary $1.4B Deal to Sell Stake in DSME as KDB Begins Auction
A preliminary deal has been struck for the Korea Development Bank to sell two-thirds of its investment in Daewoo Shipbuilding & Marine Engineering (DSME) in a transaction that would recapitalize the financially troubled shipyard with new private investors and management. KDB, which had previously said it was making it a priority to sell Korea’s third largest shipbuilder to private investors, has selected a technique typically used in bankruptcies announcing an initial accepted bid and tomorrow will commence a month-long bidding process for a 49.3 percent stake in DSME.
The shipyard and KDB announced that Hanwha Group, one of Korea’s largest conglomerates operating in aerospace, chemicals, energy, and financial services, has been selected and made a tentative agreement to pay $1.4 billion for the stake in DSME. It is what is known as a “stalking horse” bid where one company is selected to establish a base price for the investment. Hanwha had previously in 2008 sought to acquire the shipyard group but was unable to agree on a price. The proposed acquisition is part of the group’s efforts to expand its role as a defense contractor.
KDB will now open a bidding process in which other companies can propose the terms of alternate deals for DSME. If other bidders fail to offer better terms, Hanwha’s conditional investment will proceed. The bank, which currently holds a 55.7 percent stake in DSME as well as options, would reduce its stake to 28.2 percent and Hanwha will take managerial control of the shipyard. Hanwha reports that it expects to close the acquisition in the first half of 2023.
The shipyard reported a financial loss of nearly $1.2 billion in 2021 after strong profitability the year before. The losses have continued to mount with DSME reporting a loss of more than $466 million in the first half of 2022. The shipyard also suffered a crippling strike in July that further deteriorated its financial position.
KDB, which has been the majority shareholder in the shipyard for more than 20 years, said earlier this year that the company needed a private investor to focus on the long-term and enhance its financial position. In announcing the decision to proceed with the offering, the bank said that this would provide for DSME’s current shortage of funds and secure capital for future growth.
DSME has been able to build a strong order backlog during the resurgence in shipbuilding. In 2022, they received orders for 36 ships and one offshore platform valued in total at $8.6 billion. DSME has already reached 97 percent of its order target for the year.
The state-run financial institution and other creditors have reportedly provided nearly $3 billion in support to the shipyard since 2015. KDB recently questioned continuing to provide government assistance directly to the shipyard saying that it believed the company needed to be placed into private ownership.
Previous efforts to sell the shipyard included an agreement to merge DSME with Hyundai. The European Union objected to the merger saying it would greatly reduce competition for new LNG carrier construction.