Hanhwa Abandons Daewoo Shipbuilding Purchase

Korea Development Bank (KDB) yesterday terminated its agreement with Hanwha Group, which had been set to purchase a majority holding in Daewoo Shipbuilding & Marine Engineering (DSME), the world's third largest shipbuilder, from the Korean policy bank. The announcement follows three months of wrangling between the two parties over the proposed $4.9 billion acquisition.

Hanwha was expected to pay for DSME by the end of March, but as the economic downturn became ever more severe, Korea's ninth-largest conglomerate found the financing of the deal more difficult than expected. In December, Hanwha asked KDB to delay the deal or accept payment in instalments. The bank provided one more month for the acquirer to find the cash for the 50.4% stake, suggesting that the money could be raised from the sale of other Hanwha assets.

In Hanwha's official statement, issued yesterday, the conglomerate says that it was unable to even start due diligence on DSME due to protests by the shipbuilder's employees. Hanwha says that it was therefore asked to sign a contract to buy a company without the proper diligence during an industry downturn in which new orders for ships are dropping and current orders are being cancelled.

To make things worse, Hanwha was unable to propose a financing plan satisfactory to KDB. The best it could offer was to sell its shares in Korea Life Insurance; some of its property portfolio, including the building housing its own headquarters; as well as other subsidiaries to accrue just 60% of the acquisition price. Hanwha also asked to be able to pay for the acquisition over a five-year period

KDB said in a separate statement that the new financing plan, submitted on January 9, left a significant gap to the agreed price. The state-owned bank claimed that accepting these new terms, which contradict the memorandum of understanding (MOU) signed in November, would jeopardise the transparency and fairness of the public bidding process for a public corporation. KDB subsequently exercised its right to terminate the MOU.

KDB has not given up its plans to offload its stake in DSME, and intends to put it back on the market.

The two parties are not going to leave the deal amicably, however. Hanwha has paid a $220 million deposit and KDB said that it is going to keep it. A lengthy legal process is expected.

This is a bad outcome for KDB, says one source familiar with the deal. If KDB stops the process now it may be difficult for them to find as good a bid as Hanwha's.

The source points out, though, that as a government-owned entity, KDB is very much concerned with executing the sale in a clean and transparent manner, maybe more so than getting a good market price. KDB is a healthy bank compared to its peers and therefore not desperate for the cash, but it does need to divest assets like DSME as part of its ongoing privatisation process.

According to the source, the difficult process, as well as the unhappy ending, could have a negative impact on the Korean M&A market, especially to prospective international investors.

A research note put out by Macquarie concurs that KDB will have a hard time finding new bidders in the near future. Hanwha's offer of $4.9 billion for the controlling stake will be tough to match as the same portion is worth only $2.9 billion based on current share prices.

Macquarie remains bearish on DSME. Earnings for the fourth quarter of 2008 are expected to be poor; and after enjoying a 47% per annum growth in new orders between 2004 and 2007, the company was hit by a 30% year-on-year drop in new orders in November. Orders for traditional vessels fell 48%.

Hanwha, which was advised on the acquisition by J.P. Morgan, reacted well to the termination of the deal, with its share price up 10.9% at yesterday's close. DSME fell 4.4% to W19,350 ($14) per share.

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