HMM Creditors Prepare for Privatization Sale By Executing Share Conversion
Korea’s two large government-controlled financial institutions executed a required share conversion if they are going to proceed with the proposed sale of their controlling interest in HMM. The move comes in advance of an anticipated announcement next month of the selection of a preferred bidder, and is being seen by analysts as a sign that the sale of the shares in South Korea’s largest carrier is proceeding as planned.
Korea Development Bank (KDB) and Korea Ocean Business Corp (KOBC) were used in 2016 to execute a government-led financial rescue plan for the carrier then known as Hyundai Merchant Marine. They received controlling interest in the company as part of the bailout which today includes shares equal to just over 40 percent of the company, which was rebranded HMM, as well as large tranches of private equity convertible bonds and unguaranteed private bonds with warrants. The conversion of all the bonds and warrants would double the financial institutions’ share position, giving them approximately three-quarters of the shares outstanding.
After years of exploring how best to return control of the shipping line to private investors, the two financial institutions began the process in March 2023 hiring financial advisers. They began accepting interest in the sale in June and in August announced that three companies had been selected as finalists. Hapag-Lloyd, however, had also expressed interest but was excluded from the process as the government wants to keep control of the company in South Korea.
Uncertainty was raised over the process after none of the large Korean conglomerates expressed interest and entered the bidding process. Instead, the three bidders are mid-sized Korean companies and many analysts have questioned if they have the finances to buy HMM and fund future investments. The finalists are Harim, a domestic food company that is a large investor in Pan Ocean, South Korea’s largest dry bulk shipping company, Dongwon, another food producer that also has investments in logistics and port operations with the Dongwon Pusan Container Terminal, and LX, a trading company involved in semiconductors, building materials, and logistics.
HMM proposed in September the early repayment of some of the bonds with conversion rights, but the offer was rejected by the investors. Under the terms of the conversion, they have the right to buy shares at a price that is about a third of the current market value for HMM’s shares.
KDB and KOBC proposed in their offering documents that they would execute a conversion of a portion of their position, increasing their shareholdings to just under 58 percent of the shares outstanding. Analysts expressed concern that it would increase the total valuation, raising the cost to the bidders or that the conversion would represent a significant dilution in the share value of HMM.
HMM reported today in a stock exchange filing that it has been notified by the creditors, KDB and KOBC, that they have exercised their rights requesting the conversions on October 19. They will receive 80 million shares for the convertible bonds and an additional 120 million shares from the exercise of the warrants. In total, they will add 200 million shares to their position, with the shares expected for listing on November 10. This will complete a key step in the sale process raising KDB and KOBC’s combined position to the 57.87 percent stake in the offering documents. As part of the offering, the two financial institutions said they would continue to hold the remaining bonds and warrants until at least 2025 and work with the buyer to agree to terms for their later sale.
The execution of the conversion was a required step if the sale of HMM is to proceed. It will likely dilute HMM’s share price which has already fallen 30 percent as the market slowed for the container carriers in 2023 and after the news of the planned privatization sale. The decline in the share price however means that the value of sale has also likely declined from a high of nearly $6 billion to possibly under $4 billion.
Under the process outlined by the financial advisers, KDB and KOBC are scheduled to announce the preferred bidder in November. They will then finalize the terms of the acquisition, which they expect to complete in early 2024.
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