The sole purchase of HMM to POSCO… Now is the right time

The Korea Development Bank promotes a plan to sell HMM (formerly Hyundai Merchant Marine) to POSCO. It plans to promote the privatization of HMM by handing over the entire stake held by Sangeun, the largest shareholder of HMM, to POSCO. This is because HMM’s business normalization is rapidly progressing due to the booming shipping industry, and now is the right time to promote privatization.

A high-ranking government official said on the 27th that “Saneun recently reported to the Ministry of Strategy and Finance on the plan for privatization of HMM,” and “is going to begin a full-fledged review with the relevant ministries centered on the Ministry of Finance.” According to the government, the Bank of Korea has selected POSCO as the best candidate for HMM’s acquisition, and is known to be negotiating in secret. POSCO is showing strong willingness to enter the shipping industry by reviewing the establishment of a logistics subsidiary last year. A government official said, “We decided that it was necessary to secure market competitiveness by privatizing HMM rather than under the management of the creditors.” In 2018, KDB negotiated with POSCO to sell HMM, but it failed.

KDB is the largest shareholder with a 12.61% stake in HMM. The second largest shareholder is the Credit Guarantee Fund (7.51% stake), and the third largest shareholder is the Maritime Promotion Corporation (4.27%) under the Ministry of Oceans and Fisheries. The sale price, including the premium for management rights, is estimated to be around KRW 1 to 1.5 trillion.

If this deal is successful, HMM will succeed in privatizing it five years after it was incorporated as a KDB subsidiary in October 2016. HMM, the flagship company of Hyundai Group, was separated from the Hyundai Group in October 2016 due to a huge deficit following the downturn in the shipping industry. The bank was incorporated into a subsidiary and invested more than 3 trillion won in funds, but from 2016 to 2019, it incurred over 2 trillion won in operating losses. Last year, due to the shipping industry’s boom, it succeeded in turning to a surplus in 21 quarters, resulting in an operating profit of over 800 billion won.

‘HMM privatization’ in 5 years when the deal with POSCO was concluded… Expected to sell 1.5 yen
Korea Development Bank, the largest shareholder, promotes the sale of all shares

The KDB’s full-fledged privatization of HMM (formerly Hyundai Merchant Marine) is based on the judgment that it is the right time for privatization in the wake of the shipping industry boom that has come in 10 years. This is in line with the opinion of Chairman Lee Dong-geol that the competitiveness of the national infrastructure can be enhanced only by privatizing companies that have been incorporated into the KDB system. It is analyzed that Chairman Lee threw the number of matches again following Hyundai Heavy Industries’ acquisition of Daewoo Shipbuilding & Marine Engineering and the integration of Korean Air and Asiana Airlines.

Saneun should increase market competitiveness through privatization

HMM’s privatization is San Eun’s long-standing’homework’. HMM was incorporated into a KDB subsidiary in October 2016 and has undergone intensive restructuring. At that time, the goal of the KDB was’to lay the foundation for a minimum going on business’. As such, HMM’s management situation was so terrible that it was driven to bankruptcy.

Since 2016, over 3 trillion won has been invested in public funds, but the performance has not improved. Following a deficit of 83.3 billion won in 2016, it recorded a total operating loss of 2.982 trillion won by 2019. A large number of workers from Hanjin Shipping, who had gone bankrupt, were also recruited, but it did not produce any effect. In early 2018, KDB secretly proposed to acquire HMM to some conglomerates such as POSCO, but it was immediately rejected because there were great doubts about HMM’s capabilities as a continuing company.

Saneun pressed HMM more strongly. At a press conference held in November 2018, Chairman Lee said, “There is a widespread’moral hazard (moral hazard)’ in HMM,” and said, “Immediate employees will be expelled immediately.” All of the HMM executives were brought to the headquarters in Yeouido, San-eun to report on the management status every week. In February of the following year, HMM President Yoo Chang-geun, who had two years in office, resigned. It was due to direct and indirect pressure from Saneun.

Saneun’s high-intensity restructuring took effect last year in the face of a new coronavirus infection (Corona 19). With the booming shipping industry and the efforts of the KDB and the government that ordered large container ships in a timely manner, HMM succeeded in making an operating surplus in 21 quarters of last year. In the market, HMM is expected to generate an operating profit of 800 billion won last year.

In the face of the booming shipping industry, KDB sees that the time for privatization is when HMM’s management has been normalized to some extent. Chairman Lee pointed out that the longer he stays in the Sangeun system, the more his innovation mind disappears and becomes a public corporation.

POSCO aims for synergy in the shipping industry

Saneun is selecting POSCO as the best candidate for HMM’s acquisition. However, both Sangeun and POSCO avoided mentioning. An official from the bank said, “There is no specific progress.” POSCO also said, “There was no official proposal from the Bank of Korea.”

In the market, if POSCO, which has enormous financial power, acquires HMM, it is expected to create synergy in various fields. Advancing into the shipping industry is a long-standing longing for POSCO Group. This is because it is essential to reduce costs through efficient logistics. POSCO, the largest steel maker in Korea, ships about 160 million tons of raw materials and products per year. The logistics of POSCO International, a general trading company, also amount to tens of millions of tons per year. The import of rechargeable battery materials (cathode materials, anode materials, etc.) from POSCO Chemical, which POSCO Group is fostering as a future growth engine, is also on the rise. The total annual logistics costs including group affiliates are estimated to have reached 6 trillion won last year alone, at 10% of total sales.

If POSCO directly enters the shipping industry, it is expected that it will be able to reduce the cost of trillions of won per year by integrating the logistics business divided by subsidiaries. POSCO Group’s financial capacity is also sufficient. As of the end of the third quarter of last year, POSCO’s cash and cash equivalents amounted to KRW 6.76 trillion. HMM’s estimated ransom value of 1 to 1.5 trillion won can be adequately covered. Considering that the shipping industry will continue to boom this year, some analysis suggests that it can be acquired at a’fair price’.

The government, which is reviewing the request from Saneun, is also positive. Currently, there is fierce competition in the shipping industry for mega-size. Since the fourth quarter of last year, it is estimated that 30 super-large container ships of 20,000 TEU (1TEU = 1 20ft container) or higher have been ordered to shipyards around the world. A government official said, “HMM should increase its fleet and grow a’scale economy’,” said a government official. “POSCO can be the right person to continue aggressive investments in the shipping industry.”

Reporter Kang Kyung-min/Choi Man-soo [email protected]