Korea Looks at Options to Speed KSOE-DSME Merger

For the fifth time since announcing the plans to merge two of South Korea’s leading shipbuilders, Korean officials confirmed today that they have yet again agreed to delay the scheduled closing of the merger between Korea Shipbuilding Offshore Engineering Co. (KSOE) and Daewoo Shipbuilding Marine Engineering Co. (DSME). The Korea Development Bank which would sell its shares in DSME to Hyundai Heavy Industries agreed to an extension for the deadline to the end of 2021, while reports in Korea suggest efforts are underway to find alternatives to speed the completion of the transaction first announced in February 2019.

The holdup for the merger comes from delays in completing an anti-trust review primarily with European Union regulators. A total of six authorities are required to approve the transaction, with Singapore, China, and Kazakhstan so far being the only ones to signal their agreement. Korean regulators are believed to be waiting for the EU, but the European authorities have voiced concerns saying that the proposal requires an extensive review. Japan will also need to approve the merger.

Danish politician and European Commissioner for Competition at the EU Margrethe Vestager in June 2021 publicly spoke of the reservations over the deal at the European Commission. "With European shipping companies regularly purchasing vessels from DSME and HHI, two of the leading cargo shipbuilders in the world, we will carefully assess whether the proposed transaction would negatively affect competition in the construction of cargo ships, to the detriment of European consumers." 

South Korea’s President Moon Jae-in recently announced ambitious plans to grow the South Korean shipbuilding industry. The government announced a program of support and R&D designed to build leadership in what it called high-value shipbuilding focusing on next-generation ships with advanced technologies and catering to emerging markets such as hydrogen and ammonia.

Reporting in the Korean media suggests that one of the key concerns over the merger is the likely monopoly by the KSOE in the gas carrier and specifically the LNG sector if the merger is permitted to proceed. South Korea’s shipbuilders are already seen as the leaders in the gas carrier segments a position that would be advanced with agreements such as the 2020 deal with Qatar valued at $20 billion for more than 100 LNG carriers. The expertise in gas carriers is also seen as an advantage to develop future ammonia carriers.

To win regulatory approval for the merger, rumors suggest that KSOE is discussing with the Korean authorities selling off sections of its current shipbuilding business. A report in The Korea Times speculates that KSOE might be forced to sell its LNG shipbuilding business, while the paper suggests the executives were proposing divesting its investments in satellite shipyards Hyundai Mipo and Hyundai Samho Heavy Industries.

The state-owned Korea Development Bank provided a critical lifeline to the industry during the downturn in shipbuilding. They provided cash to DSME which has spent most of the last decade cash-strapped. With the current upturn in the shipbuilding market, KDB is believed to be anxious to sell its investments in all of the major shipyards. After years of effort, in July 2021 KDB finally completed the sale of its position in the former STX Offshore & Shipbuilding Company.