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South Korea’s FTC Becomes Holdout to Approval of Hanwha-DSME Deal

DSME
Korean regulators are holding up the approval for the Hanwha deal to take control of DSME (file photo)

Published Apr 3, 2023 7:23 PM by The Maritime Executive

The agreed deal for Hanwha Group, South Korea’s seventh largest conglomerate, to recapitalize financially troubled Daewoo Shipbuilding and Marine Engineering (DSME) has won international approval with South Korea’s Fair Trade Commission emerging as the surprise holdout for the deal to proceed. Seven international regulators have signed off on the transaction, but late today it emerged that South Korea’s trade regulators are expressing concerns over potential market dominance.

Hanwha, which operates in aerospace as well as defense systems, signed the deal in mid-December 2022 which calls for it to recapitalize the shipbuilder with $1.53 billion to acquire new shares and take management control of DSME. The shipyard had been controlled by the Korean Development Bank (KDB) as its largest investor. The bank last year after a costly strike said that the shipyard needed new management and capital to carry it forward. 

The European Commission confirmed today that it has become the last of the international regulators to approve the deal. The EU under its rules had till April 18 to issue a decision approving the deal or holding it over for an in-depth review. The same regulators had created a long, drawn-out review of the previously proposed merger of DSME with Hyundai Heavy Industries. They ultimately ruled that the previously proposed combination would have created market dominance and unfair conditions due to the shipbuilders’ combined market share for the construction of liquified natural gas carriers.

“The Commission concluded that the proposed acquisition would raise no competition concerns, given the companies’ limited combined market position resulting from the proposed transaction,” the European Commission wrote in the summary released in its April 3 Daily Bulletin. The EC followed the UK, Singapore, China, Japan, Vietnam, and Turkey approving the combination. 

Korean media reports are however saying that the Fair Trade Commission is responding to market concerns over the vertical integration of the equipment and weapons systems from Hanwha’s divisions with DSME which build warships for South Korea and others. The Korean FTC reports it is reviewing concerns that Hanwha could monopolize the naval vessel components market or give DSME an unfair advantage in bidding for the vessel contracts. The FTC is reportedly asking Hanwha to provide assurance and change the terms in the purchase agreement to maintain a competitive market from the company that provides radar, communications, navigation, and weapon systems.

When the agreement was first announced last year, KDB expressed confidence that it was the best solution for DSME. “Given that Hanwha and DSME have engaged in different industries, the approval procedures for their merger will be completed in the near future,” KDB had predicted. 

The Korean news agency Yonhap is reporting that the FTC made the request to Hanwha last month to address the concerns about potential anti-competitive issues. At the same time, the Korean Herald is reporting that the FTC has requested that Hanwha revise the terms of the agreement four times since it was completed last December. 

The Korean regulators normally can extend the review up to a maximum of 120 days after receiving the filing. Speculation was that they would issue their decision on April 18 at the same time as the EU, but Korean media reports are saying that the review is being delayed “indefinitely” while they seek concessions from Hanwha to ensure that it would not provide more favorable terms to DSME over other competitors for future military contracts.

The delay comes as DSME continues to have financial difficulties. At the beginning of March, the shipbuilder reported an annual financial loss of more than $1 billion due to increased costs and the impact of the 2022 strike and labor settlement. The operating loss was narrowed slightly to approximately $765 million, and the shipyard reported despite continuing higher costs that strong orders and the resulting backlog was contributing to increased sales figures. DSME has reported financial losses in three of the four past years with KDB saying that it would require private capital and new management going forward.