DSME should pursue self-rescue efforts to stay afloat
Daewoo Shipbuilding & Marine Engineering Co. (DSME) has signed a preliminary investment deal with Hanwha Group, paving the way for the latter's takeover of the debt-ridden shipyard. Under the memorandum of understanding (MOU) signed between the two, Hanwha's subsidiaries will participate in a 2 trillion won ($1.4 billion) rights offering for a 49.3 percent stake.
The deal, if finalized, will enable DSME to find a new owner since it was put under the control of state-run Korea Development Bank (KDB) in 2001. Hanwha first attempted to acquire DSME in 2008, but to no avail due to a liquidity crunch amid the global financial crisis at the time. Equipped with competitive prowess in the defense industry and energy, Hanwha apparently seeks to take advantage of DSME's units that manufacture special purpose vessels (military ships like submarines).
DSME will also gain momentum in its bid to get back on track under the new ownership. Expectations are mounting that Hanwha's possible takeover will help boost the domestic shipbuilding industry as the nation's seventh-largest conglomerate will better manage the troubled shipbuilder and end the sluggish performance.
Despite such positive aspects, concerns are also increasing. First, DSME should make utmost efforts to stay afloat, boosted by the envisioned takeover. DSME has been hemorrhaging over the past two years despite recent signs of robust overseas orders. Its losses accumulated to 7.7 trillion won over the past 10 years, including a 1.7 trillion won deficit posted last year.
Its debt-to-equity ratio stood at 676 percent with total debt surpassing 10 trillion won in the first half of this year. More than 12 trillion won of taxpayers' money has been poured into the troubled shipbuilder since 2001. This means the shipyard has managed to survive only due to state budget infusions. Against this backdrop, an easy-going atmosphere has been gripping the firm, coupled with lax practices.
For starters, the previous managements, mainly consisting of elite officials appointed to the positions, attempted to fabricate financial statements to conceal huge amounts of losses. Its trade union played a major role in rupturing the envisioned merger between DSME and Hyundai Heavy Industries (HHI) by visiting the EU's headquarters in January, calling for the deal to be disapproved. It has also triggered a "low-price" competition, dealing setbacks to domestic shipyards.
More recently, DSME's subcontracted workers staged a sit-in protest, resulting in 700 billion won in damage. The protest was triggered by the practice of saving costs via multilayered subcontracts after orders were won at very low prices. KDB is poised to determine the final acquirer by the end of the year to complete the takeover by the first half of 2023. DSME's trade union vowed Tuesday to stage an all-out protest against any unilateral push for a sale without the union's consent. The trade union issue will surely become the biggest barrier to the envisaged takeover.