Hanwha Group will undergo a merger review by South Korea's Fair Trade Commission (FTC) after building a stake of more than 15% in Korea Aerospace Industries (KAI) (047810.KS). The outcome is drawing attention because it would expand a private company's influence over a core national aerospace firm whose largest shareholder is a state policy lender.
Hanwha said on the 10th that it holds a combined 15.89% of KAI, with Hanwha Aerospace (012450.KS) owning 9.90%, Hanwha Systems 4.98% and Hanwha Aerospace USA 1.01%. The disclosure comes a month after Hanwha Systems announced on the 8th of last month that it would spend 500 billion won ($362 million) to buy KAI shares on the open market, adding another 3.45% over the period. The move cements Hanwha's position as KAI's second-largest shareholder, behind the Export-Import Bank of Korea, which holds 26.4%. As a second-largest shareholder with a 15.89% stake, Hanwha is weighing ways to take part in KAI's decision-making on matters such as improving synergy through business cooperation between the two companies and supporting expanded global exports.
Holding more than 15% of KAI, however, requires a government decision. Hanwha said it would file for a merger review with the FTC because it has acquired more than 15% of KAI, a listed company. Under the Fair Trade Act, a business combination does not mean only a full takeover of management control or becoming the top shareholder. A second-largest shareholder with more than 15% can still exert considerable influence, including blocking special resolutions at shareholder meetings by exercising veto rights, demanding board seats and taking part in major management decisions.
Choi Kwang-sik, an analyst at Daol Investment & Securities, said the FTC would review the effect of Hanwha's expanded stake on the market's competitive structure. "What it looks at most closely is any restraint on competition arising from vertical integration," he said. Hanwha Group supplies core components to the defense industry, including aircraft engines, radar, weapons and avionics. KAI performs the final assembly of complete aircraft such as fighter jets and helicopters. The reasoning is that if Hanwha becomes a major shareholder of KAI, a manufacturer of complete aircraft, by holding more than 15% of its shares, the FTC must strictly examine whether Hanwha could exclude competing parts suppliers or monopolize KAI's internal information. This is also a concern raised by KAI's labor union over conflicts of interest.
Hanwha Group argues that cooperation with KAI is indispensable if it is to emerge as a leading national company with an "integrated land, sea, air and space" solution for future battlefields that are increasingly unmanned, intelligent and large-scale. For KAI, using Hanwha's overseas networks and integrated packages could strengthen its export competitiveness and is expected to generate synergy, Hanwha Group said, adding that this would also help enhance KAI's corporate value by strengthening its competitiveness and lifting its share price.
Hanwha Group expects to clear the review smoothly, anticipating that it will qualify for a simplified review that processes cases quickly through streamlined procedures and forms rather than a standard review. Whether it buys additional KAI shares is expected to be decided after the review's outcome.
In response, the FTC said that acquiring more than 15% of a listed company triggers a merger filing requirement. "When a filing comes in, we will examine the businesses conducted by the acquiring company and the acquired company and review, in accordance with the law and standards, whether it is a horizontal, vertical or conglomerate combination and whether a controlling relationship is being formed," the commission said, explaining that the review considers not only the shareholding ratio but also whether an actual controlling relationship is being established.
An FTC official said the commission would issue its decision after comprehensively reviewing the effect of the combination on market competition. "The review period is basically within 30 days and can be extended to up to 90 days if additional review is needed, but the time spent on supplementing materials is excluded from the review period," the official said.
