Vice Chairman Kwon Oh-gap of Hyundai Heavy Industries (HHI) Holdings and Chairman Lee Deon-geol of the Korea Development Bank (KDB) hold a certificate of a deal on HHI’s acquisition of Daewoo Shipbuilding & Marine Engineering (DSME) at the KDB headquarters in Yeouido, Seoul, on March 8. (Photo: HHI)

Hyundai Heavy Industries (HHI) Group’s recent deal with the Korea Development Bank (KDB) to acquire Daewoo Shipbuilding & Marine Engineering (DSME) is the first step toward the inauguration of a mammoth shipbuilding company that will take up a 21 percent stake of the global shipbuilding market.

The consolidation of HHI and DSME, ranking 1st and 2nd in terms of shipbuilding order backlog in the world, will likely see the sagging Korean shipbuilding industry restore to normal faster than had been forecasted.

Upon signing a deal with KDB, a main credit bank of DSME on March 8, Vice Chairman Kwon Oh-gap of HHI Holdings said four shipbuilders of the HHI group will be optimized for sales, design and production, while the newly created entity, tentatively named “Korea Shipbuilding & Marine Engineering,” will evolve into a control tower and R&D company.

HHI Group plans to conduct due diligence into DSME following the signing of the deal. DSME went into a workout program in 1999 following the breakup of Daewoo Business Group. More than 10 trillion won in taxpayers’ money had been funneled into DSME, which has suffered sagging business performances in the aftermath of accounting fraud.

If the due diligence into DSME is completed, HHI group and KDB plan to inaugurate a new sub-holding company, a merger of HHI and DSME, under the control of the group. HHI Group plans to convene a shareholder’s meeting to approve the splitting of the merged entity and a business company specializing in the operation of shipbuilders. Under the agreement, KDB will hand its 55.7 percent stake in DSME to the merged entity, and receive new shares in the rights offering.

The merged entry will funnel a maximum of 2.5 trillion won through its participating in capital increase by issuing new shares. HHI Holdings will be the biggest shareholder with a 28 percent share in the new entity through share swaps, and KDB will be the second largest shareholder with an 18 percent stake. The merged entity will have as subsidiaries not only DSME, but also HHI, Hyundai Samho Heavy Industries and Hyundai Mipo Dockyard, the three existing shipbuilders of HHI Group.

The newly inaugurated entry will see a combined backlog rise to 16.98 million compensated gross tons (CGT) as of last year, accounting for a 22.2 percent share in the global shipbuilding market. The figure is more than three times of the backlog of Imabari Shipbuilding Co, the world’s No. 3 shipbuilder, which has 5.25 million CGT, or a 6.6 percent share.

HHI and DSME are expected to have bigger price competitiveness as the two shipbuilders have been under fire for undercutting order prices as a result of a cut-throat competition. HHI’s acquisition of DSME is assessed to have more bargaining power in winning orders to build LNG carriers over which the two have an cutting edge.

The two shipbuilders had a 72.5 percent share in the global LNG carrier shipbuilding market. HHI Group have lots of barriers on the plate to be tackled such as labor unions’ opposition and a nod by regulation authorities, toward the inauguration of the merger entry.