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EU, KFTC delaying HHI-DSME merger process

The proposed merger between Hyundai Heavy Industries (HHI) and Daewoo Shipbuilding & Marine Engineering (DSME) will face a crucial moment possibly in the third quarter of this year, as the European Commission has delayed a key decision whether the shipbuilding giants’ transaction will impede effective competition in the region.

Though HHI has already restructured the shareholding structure of the group to embrace DSME under its intermediate holding firm, an opposition from the EU can jeopardize the whole plan. Since the Korean antitrust authority is expected to make its own decision amid EU’s announcement, the looming announcement is garnering greater attention.

The EU deferred the proposed HHI-DSME merger deal until July this year as the European regulator said it wanted more time to assess the ramifications of the merger.

In March 3, HHI Group signed a $1.7 billion deal to buy its smaller rival DSME from the state-run Korea Development Bank. The lender was the largest shareholder of DSME with a controlling 55.7 percent stake.

Following the deal, HHI Group spun off its flagship unit HHI and set up Korea Shipbuilding & Offshore Engineering as the intermediate holding firm controlling HHI, DSME and its two other shipbuilding units. If the transaction is finalized, the two companies’ combined backlogs in very large crude carriers (VLCCs) and LNG carriers will each account for more than 60 percent of the world total.

Due to their monopolistic market status, HHI requested approval from competition authorities in related countries ― Korea, China, Japan, Singapore and Kazakhstan ― and the EU, so that their presence neither undermines the bargaining power of smaller rivals in those respective markets nor damages customers there.

The EU competition enforcer recently warned that the deal could create a combined entity have a 21 percent market share, helping it push up prices. European shipping companies are HHI and DSME’s biggest customers.

So far, Kazakhstan has approved the transaction, and HHI is waiting for each antitrust authorities’ decision. Of them, the decision from the European Commission is considered as the most influential, given European shipping companies are major customers of DSME and HHI and represent 30 percent of worldwide demand for cargo ships.

In the commission’s preliminary market review, however, the odds were apparently against HHI. The commission said in a statement that it has “concerns that the proposed transaction may remove DSME as an important competitive force in the markets of large containerships, oil tankers, LNG and LPG carriers.”

Also, it added that “the remaining shipbuilders would not exert sufficient competitive pressure on the merged entity in the four markets,” therefore the transaction “may significantly reduce competition in the market for cargo shipbuilding, which could lead to higher prices, less choice and reduced incentives to innovate.”

Since HHI has to gain approval from all countries to which it sent requests, possible opposition from the EU will prevent the merged firm from operating in Europe, thus leaving no reason for the company to pursue a merger. Japan, which is also reviewing the transaction, appears to be leaning toward opposition, as the country filed a WTO petition over the merger, claiming the South Korean government was providing subsidies to the domestic shipbuilding industry.

Korea’s Fair Trade Commission (KFTC) is conducting an in-depth review of the deal, requesting various data from the two companies. HHI requested a KFTC review July 1 last year, and the antitrust watchdog was supposed to finish this within 120 days, by Dec. 20. Based on the recent decision by the EU to defer the process, the South Korean anti-trust regulator also plans to defer its decision to the end of the third quarter of this year.

The review has been protracted because the KFTC has been requesting additional documents and data from the companies, industry officials said. If the KFTC requests additional documents, the review stops and the halted period does not count in the 120-day limit.

Citing this, the officials said the delay of the decision by the KFTC is also aimed at getting away from political pressure in the upcoming April 15 General Election.

Unions at the companies and politicians in DSME’s base of Geoje, South Gyeongsang Province, have been opposing the merger citing potential job cuts afterwards.

HHI refused to comment on the ongoing review of the merger, adding it will do its best to help.
Source: Korea Times

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