Korea Aerospace Industries Ltd. (047810) surged the most in more than a year in Seoul after Hyundai Heavy Industries Co. (009540) offered to buy a stake in the maker of supersonic trainer jets, rivaling a bid from Korean Air Lines Co.
The planemaker jumped 15 percent, the most since its June 2011 trading debut, after shipbuilder Hyundai Heavy offered to buy a 42 percent shareholding being sold by investors led by Korea Finance Corp. The stake is worth $1.02 billion, based on today’s closing price.
Hyundai Heavy’s entrance revives a sale that had been in danger of collapse because state-controlled Korea Finance needs at least two offers before it can sell an asset. The Ulsan, South Korea-based builder of commercial ships and submarines is competing for the stake as South Korea buys more fighters and helicopters to counter higher defense spending in North Korea.
“Hyundai Heavy entering the race changes everything,” said Paul Hah, a Woori Investment & Securities Co. analyst. An investment from the shipbuilder would also “be a far better scenario for Korea Aerospace” than a deal with Korean Air, he said.
The two bidders filed preliminary offers yesterday, according to Korea Finance, which is selling shares with Hyundai Motor Co. (005380), Samsung Techwin Co. and Doosan Group. It didn’t say how much the companies offered. The bidders will get to inspect Korea Aerospace’s books before making final offers next month.
Hyundai Heavy may follow Japanese shipbuilders Mitsubishi Heavy Industries Ltd. (7011) and Kawasaki Heavy Industries Ltd. into aerospace as it contends with rising competition from Chinese yards and a global slump in orders for commercial vessels. The company has posted five straight declines in quarterly profit.
“The purchase could provide Hyundai Heavy with a stable source of income, especially now when its main business isn’t doing all that well,” Hah said. The company also “has the marketing network that could help Korea Aerospace sell its trainer jets and other products.”
The Sacheon-based planemaker was the best performer on the MSCI Asia Pacific Index today. The stock has fallen 29 percent this year, compared with a 9.3 percent gain for South Korea’s benchmark Kospi index. The company had a market value of $2.4 billion, according to data compiled by Bloomberg.
Hyundai Heavy fell 1.6 percent to 252,500 won, compared with a 0.4 percent decline for the 10-stock KRX Shipbuilding Index. Seoul-based Korean Air dropped 3.5 percent to 47,550 won.
Korea Aerospace got 57 percent of its 1.29 trillion-won sales from the nation’s military last year. The company builds the T-50 jet-plane trainer, which was developed with Lockheed Martin Corp., and a helicopter that was devised with Eurocopter. The company, which also makes drones and parts for commercial planes, will begin building a fighter version of T-50 next year. It’s also working on the nation’s first heavy fighter.
South Korea’s Defense Acquisition Program Administration is seeking a 6.3 percent increase in its 2013 budget to 10.5 trillion won for purchases of artillery, jet fighters, tanks and warships.
Hyundai Heavy bid for the Korea Aerospace stake six weeks after an initial registration deadline. Korea Aerospace had fallen 12 percent through yesterday since Aug. 16, the initial deadline for expressions of interests, which only Korean Air met. The carrier already has a unit making parts for Boeing Co. and Airbus SAS planes.
Hyundai Heavy has been monitoring the Korea Aerospace sale and it decided to bid as the aviation industry could provide a good growth opportunity, said spokesman Kim Ki Young.
Korean Air hopes for a fair and transparent bidding process, the carrier said in an e-mailed statement. The company has experience and technology in making aircraft, and a takeover of Korea Aerospace will help avoid any investment duplications and create more synergy, it said.
Hyundai Heavy has already responded to competition from Chinese yards for dry-bulk vessels by moving its focus onto more complex models such as larger container-ships and liquefied natural-gas tankers. The company also makes excavators and builds power stations.
The company also formed an alternative-energy division in 2010 and bought oil refiner Hyundai Oilbank Co. the same year to further pare its reliance on shipbuilding. The green energy division has been losing money since last year as the global economic slowdown saps demand.
“Hyundai Heavy really needs something for future growth given that the demand in the alternative-energy market is so weak,” said Lee Jae Won, an analyst at Tongyang Securities Inc. in Seoul.
The green energy business made an operating loss of 23.8 billion won in the first half of this year following a full-year loss of 175.2 billion won in 2011. Global ship orders fell 47 percent through August this year, according to shipbroker Clarkson Plc.
Korea Aerospace has a limited pool of potential bidders because national-security rules mandate that it remains under local ownership. The company plans to spend 245.4 billion won this year, including construction of a new plant that will make wing components for Airbus A320 planes under a record $1.2 billion deal signed in March.
Hyundai Heavy has raised 1.75 trillion won this year selling debt and shares. It may raise another 1 trillion won in bonds, loans and other means, according to a Newspim report in August. The shipbuilder had $11 billion of current assets at the end of June compared with Korean Air’s $2.5 billion, according to data compiled by Bloomberg.
“Between the two bidders, Hyundai Heavy would be a better choice for Korea Aerospace,” said Tongyang’s Lee. “In the long-term, it would be a win-win for both companies.”
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