Hanwha Group is accelerating its accumulation of shares in Korea Aerospace Industries (KAI) (047810.KS), fueling speculation that the group has made up its mind to eventually acquire management control of the company.
Hanwha Systems (272210.KS) held a board meeting Tuesday and disclosed that it will purchase KAI shares on the open market within a limit of 500 billion won by the end of the year, according to defense industry sources Wednesday. The move effectively hands the baton from Hanwha Aerospace (012450.KS), which exhausted nearly 1 trillion won in investment funds early that day. Hanwha Aerospace began openly accumulating KAI shares in early May, buying up 1 trillion won worth in just two months.
Hanwha affiliates' KAI holdings break down as follows: Hanwha Aerospace with 9,652,845 shares (9.90%), Hanwha Systems with 1,487,530 shares (1.53%), and Hanwha Aerospace USA with 986,625 shares (1.01%). If Hanwha Systems spends 500 billion won to buy approximately 3.12 million additional shares, its stake would rise to 4.73%. Hanwha Group's total stake in KAI would climb from 12.44% to 15.64%. That would further solidify its position as the second-largest shareholder after the Export-Import Bank of Korea, KAI's largest shareholder with 26.41%.
However, Hanwha said the figure is merely a ceiling on investment available through year-end and by no means implies it will invest the full amount. The watershed is whether the stake exceeds 15%. Crossing that threshold would require Hanwha Group to file a business combination report and undergo an intensive review by the Fair Trade Commission on whether the deal restricts market competition. For this reason, the prevailing view is that Hanwha will hold its stake at 14.99% and wait for the right moment to purchase part of the Export-Import Bank's stake with a management control premium attached.
The problem is that KAI's labor union is extremely wary of Hanwha's participation in management, and the government cannot help but be conscious of potential controversy over an unnecessary fire-sale. "If an acquisition attempt through stake expansion becomes a reality, we will respond by mobilizing all available means to protect KAI's independence and industrial base," a union official stressed. Under the Defense Acquisition Program Act, anyone seeking to effectively acquire management control of a defense contractor must also obtain prior approval from the Minister of Trade, Industry and Energy.
