Hanwha Group set to expand defence business by acquiring DSME

September 28, 2022

A giant crane at Daewoo Shipbuilding and Marine Engineering's dockyard in Geoje Island

Since 2015, 4.1 trillion won in Korean taxpayers’ money has been put into Daewoo Shipbuilding and Marine Engineering (DSME) to keep the ailing company afloat, but it will be sold off to Hanwha Group for no more than two trillion won, which is less than half of the public money spent on it.

In particular, Hanwha will acquire DSME not by directly purchasing the 55.7 percent stake from Korea Development Bank but by participating in DSME’s capital increase through third-party allocation of new shares. Hanwha will secure a 49.3 percent stake in DSME this way, but the money it will pay for the stake acquisition will go to DSME, not to KDB. This means that KDB will not recover a single penny of the funds it invested to normalize DSME, although its stake will be lowered from 55.7 percent to 28.3 percent.

The proceeds from the sale of DSME’s new shares will be used to normalize the shipbuilder, which is in immediate need of money as its debt ratio reached 379 percent on a consolidated basis at the end of last year.

Hanwha will acquire DSME at a price that is one-third of the level it offered 13 years ago. In 2008, it tried to take over DSME by investing more than 6 trillion won, but gave up the acquisition bid due to the global financial crisis.

This time, Hanwha was initially interested in the special ship unit of DSME’s defense industry division. However, the special ship unit and the merchant ship unit share shipbuilding docks, so it is difficult to distinguish assets. Furthermore, the local community around DSME’s dockyard was opposed to splitting the shipbuilder. Then, KDB recommended Hanwha to take over the whole company.

By taking over DSME, Hanwha will secure the ability to build submarines and destroyers, which will help the group emerge as an integrated defense company capable of producing land, air and sea defense systems. On top of that, DSME has secured a large shipbuilding order backlog until 2026 thanks to the recent boom in the liquefied natural gas (LNG) carrier sector.

However, Hanwha is faced with many tough challenges. DSME incurred a loss of 1.75 trillion won on a consolidated basis in 2021 and its debts total 8.4 trillion won. Furthermore, the macroeconomic environment is rapidly deteriorating due to global inflation and the continuing Ukraine-Russia war.

DSME’s shipbuilding facilities and equipment are in need of improvement, which requires steady funding. “DSME needs to invest in the development of eco-friendly next-generation engines to sharpen its competitive edge against chasing Chinese shipbuilders,” an industry insider said.

Reestablishing a relationship with the labor union is also a burden for Hanwha. The group may have trouble in negotiating wage hikes and welfare benefits with DSME unionists. On hearing news about Hanwha’s takeover of DSME, the DSME branch of the National Metal Workers’ Union reacted strongly. It expressed opposition in a statement, describing KDB’s stake sale as a “one-sided, closed-door deal that gave special favors to Hanwha.”

Source: BusinessKorea