Shares of two shipping companies Hanjin Shipping and Hyundai Merchant Marine plummeted on a report that the government was discussing whether to merge or sell them off in an attempt at state-led industrial restructuring.
Hanjin Shipping saw its stock drop 4.76 percent to close at 4,700 won ($4), while Hyundai Merchant Marine saw a much sharper drop, declining 13.78 percent to 5,130 won.
Institutional and foreign investors started unloading shares after the JoongAng Ilbo reported exclusively on Monday that a vice-ministerial meeting on restructuring, which was organized and led by the Financial Services Commission and vice ministers of each ministry, has asked whether Korea needs to keep both shippers, both of which have a lot of debt.
Some government officials reportedly discussed the fundamental solution of selling off the companies at last week’s meeting.
“We need to analyze if Korea has to keep its current system, in which two large companies exist as the national shipping companies,” said an unidentified representative from the Ministry of Oceans and Fisheries, which is in charge of the shipping industry. “If needed, we need to consider more fundamental solutions like sell-offs.”
With the companies’ merger being made as an official item of discussion, the vice ministers will discuss more at a regular meeting, which may take place as early as this week.
The government already suggested a voluntary merger of the two companies unofficially, the JoongAng Ilbo report said, but the two were known to have rebuffed the idea.
Hanjin Shipping, an affiliate of Hanjin Group founded in 1977, is the nation’s largest player in the industry. Hyundai Merchant Marine is the No. 2 player and an affiliate of Hyundai Group, which was managed by the late Chung Mong-hun and is now managed by his widow Hyun Jeong-eun, the current chairwoman of the group.
The two companies have seen operating losses for a couple of years due to a slowdown in global trade after the global financial meltdown in 2008 and shrinkage of China’s imports and exports.
Hyundai Merchant Marine has a cumulative operating loss of 679.6 billion won ($585.9 million) for the past 10 consecutive quarters. Hanjin Shipping saw losses in six out of eight quarters in 2013 and 2014. The company had some operating profits this year, but it still has a cumulative loss of about 320 billion won for the past 10 quarters.
Low growth and low demand are now considered a new normal for the shipping industry, which is why the government is thinking of restructuring.
If the ministerial meeting decides to stop support for the industry, creditors – mostly state-run banks like Korea Development Bank – are likely to turn off the credit tap, which will make it difficult for the two companies.
Hyundai denied the JoongAng Ilbo report, saying, “[The company] has never received such suggestions, both officially or unofficially.”
Shipping industry insiders say a merger, even if it happens, wouldn’t create much synergy because the companies have similar shipping routes and similar business units.
“The merger may create synergy if Hanjin and Hyundai were working in different sectors, but they both only have oceangoing container vessels after selling liquefied natural gas [LNG] and bulk carriers,” said Cho Bong-gi, director of the Korea Shipowners’ Association, by phone. “From the industry’s point of view, a merger doesn’t change things much. It may help the government in debt management from a creditor point of view.
The industry also thinks that the local shipping industry will overcome its crisis.
“Shipping demand is slowly rising,” Cho said. “Many analysts forecast that local shipping companies will be able to see revenues grow a few years later, as early as 2017 or 2018.”
However, analysts say that a merger may help the local shipping industry’s competitiveness, and it is a global trend to expand via M&As. They point out that the Chinese government is attempting to merge China Ocean Resources and China Shipping.
“The shipping industry needs the economies of scale to reduce production cost,” said Ryu Je-hyun, a senior researcher at KDB Investment & Securities, by phone. “A merger would create synergy, as the new company can reduce production costs by only holding profitable ships [from the original two companies].
“However, the merger requires the government’s financial support,” Ryu added.
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