As of July 24, Hanwha Group held 14,273,300 shares of Korea Aerospace Industries (KAI). Compared with the previous reporting date of the 16th (13,262,470 shares), that marked an increase of 1,010,830 shares. Its stake rose 1.03 percentage points, from 13.61% at the prior report to 14.64%. Hanwha has more than quadrupled the holding in seven months from just 3.2% at the end of last year.
On July 8, Hanwha Systems held a board meeting and announced it would purchase KAI shares on the open market up to 500 billion won by year-end. As Hanwha Aerospace exhausted nearly 1 trillion won in investment funds ahead of schedule, Hanwha Systems is taking over the baton. If Hanwha Systems spends 500 billion won to buy more shares, the entire Hanwha Group's KAI stake will rise from 12.44% to 15.64%.
By affiliate, Hanwha Aerospace holds 9.90%, Hanwha Systems 3.73%, and Hanwha Aerospace USA 1.01%. If Hanwha Systems invests the full 500 billion won and raises its stake to 4.73%, at the group level Hanwha would further cement its position as the second-largest KAI shareholder, behind top shareholder the Export-Import Bank of Korea (26.41%).
Since late last year, Hanwha Group has expanded its share purchases, overtaking the National Pension Service (8.12%) to become KAI's second-largest shareholder. The stake gap with the top shareholder, the Export-Import Bank of Korea (26.41%), has narrowed to 11.77 percentage points. The keenest interest is whether the stake will exceed 15%. If it does, Hanwha Group must file a business combination report and undergo an intensive review by the Fair Trade Commission.
In the defense industry, the prevailing view is that Hanwha's pace of share expansion will accelerate further. This is because of the strong resolve of Hanwha Chairman Kim Seung-youn, who dreams of a "comprehensive space company," and Vice Chairman Kim Dong-kwan, who aims to develop the group into a "Korean Lockheed Martin." After buying a 4.99% KAI stake this March, Hanwha two months later formally stated its purpose of holding the stake as "participation in management."
A business community official said, "There is a high possibility that Hanwha will raise its stake above 15% by expanding its KAI holdings by year-end," adding, "Its recent moves can be seen as an effort to expand its influence over KAI and leave open the possibility of securing management control down the road." At the group level, Hanwha is reportedly planning to expand its stake through Hanwha Systems to above 15%—the threshold triggering a business combination review—by year-end.
Hanwha Group's 'Three' Scenarios for a KAI Merger and Acquisition
What are the chances that Hanwha, armed with space and defense technology, could leap into a "Korean SpaceX" through a merger and acquisition (M&A) combining KAI's finished-aircraft development capabilities? Realistically, three main scenarios are being discussed.
First, the top shareholder, the Export-Import Bank of Korea (Eximbank), sells its 26.41% KAI stake on the market, and Hanwha directly acquires it by adding a management control premium.
In this case, Hanwha would instantly become KAI's largest shareholder and leap into the nation's largest defense company, encompassing the aerospace industry as well. However, since KAI is a company built with taxpayer money, this comes with the premise that the government must first make a policy judgment on privatizing KAI and secure a sale price sufficient to recover the public funds invested.
The second option is for Hanwha to acquire from Eximbank's stake only the amount needed to secure the largest-shareholder position. This is a compromise in which the government retains part of its stake while Hanwha secures management control. If the company's value rises after privatization, the government can sell its remaining stake at a higher price, which is also advantageous in terms of recovering public funds. Conversely, if the government continues to hold its stake, a European-style model—in which the state remains a major shareholder of a strategic defense company, as with Airbus and Thales—is also possible.
Finally, there is a de facto privatization scenario in which Eximbank retains its top-shareholder status while Hanwha actively participates in management as the second-largest shareholder. Through participation in the board and management, Hanwha could strengthen strategic cooperation with KAI and pursue export expansion and enhancement of corporate value. Because it would participate in management without an acquisition process, some assess that this could reduce monopoly controversy and serve as a realistic alternative to ease resistance from KAI's labor union.
Sale of a Defense Company Requires Ministry of Trade, Industry Approval
There are also hurdles Hanwha Group must clear to acquire and merge with KAI. If it acquires or merges immediately, it would attain a monopolistic position and must pass the Fair Trade Commission's business combination review. The biggest obstacle is the procedure requiring mandatory approval from the Minister of Trade, Industry under Article 35, Paragraph 3 of the Defense Acquisition Program Act, as well as the act's enforcement decree and enforcement rules.
Under Paragraph 3, when a substantial change in management control is anticipated due to the sale, auction, or merger and acquisition of a defense company, or other reasons, and it falls under the standards set by presidential decree, the party seeking to substantially acquire management control over the defense company must submit relevant documents in accordance with presidential decree and obtain the Minister of Trade, Industry's approval in advance.
Furthermore, Paragraph 4 stipulates that when the Minister of Trade, Industry intends to grant approval under the main text of Paragraph 3, the minister must consult in advance with the Commissioner of the Defense Acquisition Program Administration (DAPA). Because defense is directly tied to national security, DAPA's consent is also required, with the aim of having DAPA comprehensively review the impact of a defense company's sale on defense materiel procurement and whether security requirements are met.
In sum, under Article 35, Paragraph 3 of the Defense Acquisition Program Act, Article 45, Paragraph 2 of its enforcement decree, and Article 31 of its enforcement rules, the review results of the Ministry of Trade, Industry and DAPA must be reflected when acquiring management control over a defense company. In other words, the acquiring company must obtain approval from both the Minister of Trade, Industry and the Commissioner of DAPA.
The approval process proceeds as follows: (1) an application for approval of the defense company's sale (company → Ministry of Trade, Industry); (2) consultation among relevant agencies (Ministry of Trade, Industry and DAPA); and (3) a final decision on whether to approve the sale (Ministry of Trade, Industry). The most recent approval case was Hanwha Group's (Hanwha Aerospace and other affiliates) acquisition of Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean) in 2023.
