With Ship Orders Slumping, Hyundai Heavy Eyeing Aerospace Industry Entrance

On September 7, Korea Aerospace Industries Ltd. held a ceremony to celebrate the 10th anniversary of the first flight of its “T-50” design at its headquarters in Sacheon. Photo: Korea Aerospace Industries Ltd.

(Bloomberg) — Hyundai Heavy Industries Co., the world’s biggest shipbuilder, made a preliminary bid for an $890 million stake in planemaker Korea Aerospace Industries Ltd. to pare its reliance on the shrinking market for new vessels.

The company and Korean Air Lines Co. filed separate offers for a 42 percent shareholding yesterday, according to Korea Finance Corp., which is among investors selling shares. The bidders will get to inspect Sacheon-based Korea Aerospace’s books before making final offers next month, the financier said. It didn’t say how much the companies had offered.

Hyundai Heavy may follow Japanese shipbuilders Mitsubishi Heavy Industries Ltd. and Kawasaki Heavy Industries Ltd. into aerospace as it contends with rising competition from Chinese yards and a global ship order slump. The Ulsan-based company may be a better owner for Korea Aerospace than Korean Air because of its stronger financing and greater experience in the military sector, said Woori Investment & Securities Co. analyst Paul Hah.

“Hyundai Heavy taking over would be a far better scenario,” he said. “The purchase could also provide Hyundai Heavy with a stable source of income, especially now when its main business isn’t doing all that well.”

Korea Aerospace got 57 percent of its 1.29 trillion-won sales from the nation’s military last year. The company builds the T-50 jet-plane trainer, which was developed with Lockheed Martin Corp., and a helicopter that was devised with Eurocopter. The company will begin making a fighter version of T-50 next year and it’s working on South Korea’s first heavy fighter plane.

Late Bid

Hyundai Heavy, which builds submarines and warships alongside commercial vessels, bid for the Korea Aerospace stake six weeks after an initial registration deadline. Its entrance may help the shareholders, which also include Hyundai Motor Co., Samsung Techwin Co. and Doosan Group, complete a deal this year as planned. The sale had been on course to fall apart as state- controlled Korea Finance needs at least two offers before it can sell an asset.

“Everyone expected the Korea Aerospace sale to fail,” Ha said. “Hyundai Heavy entering the race changes everything.”

Korea Aerospace has fallen 12 percent in Seoul trading since Aug. 16, the initial deadline for expressions of interests, which only
Korean Air met. The carrier already has a unit making parts for Boeing Co. and Airbus SAS planes.

Hyundai Heavy has been monitoring the Korea Aerospace sale and it decided to bid as the aviation industry could provide a good growth opportunity, said spokesman Kim Ki Young.

Chinese Competition

The shipbuilder has already responded to competition from Chinese yards for dry-bulk vessels by moving its focus onto more complex models such as larger container-ships and liquefied natural-gas tankers. The company also makes excavators and builds power stations.

The company formed an alternative-energy division in 2010 and bought oil refiner Hyundai Oilbank Co. the same year to further pare its reliance on shipbuilding. The green energy division has been losing money since last year as the global economic slowdown saps demand.

“Hyundai Heavy really needs something for future growth given that the demand in the alternative-energy market is so weak,” said Lee Jae Won, an analyst at Tongyang Securities Inc. in Seoul. The green energy business made an operating loss of 23.8 billion won in the first half of this year following a full-year loss of 175.2 billion won in 2011.

The slump and waning ship prices have contributed to Hyundai Heavy posting five straight declines in quarterly profit. Global ship orders fell 47 percent through August this year, according to shipbroker Clarkson Plc.

Hyundai Heavy has fallen 0.2 percent this year in Seoul trading, compared with an 8.9 percent jump for the benchmark Kospi Index. The company rose 1.6 percent yesterday before the bid announcement. Korea Aerospace declined 2.4 percent to 24,300 won. The planemaker has a market value of $2.1 billion, according to data compiled by Bloomberg.

Security Concerns

Korea Aerospace has a limited pool of potential bidders because national-security rules mandate that it remains under local ownership. The company plans to spend 245.4 billion won this year, including construction of a new plant that will make wing components for Airbus A320 planes under a record $1.2 billion deal signed in March.

Hyundai Heavy has raised 1.75 trillion won this year selling debt and shares. It may raise another 1 trillion won in bonds, loans and other means, according to a Newspim report in August. The shipbuilder had $11 billion of current assets at the end of June compared with Korean Air’s $2.5 billion, according to data compiled by Bloomberg.

“Between the two bidders, Hyundai Heavy would be a better choice for Korea Aerospace,” said Tongyang’s Lee. “In the long-term, it would be a win-win for both companies.”

-By Kyunghee Park. Copyright 2012 Bloomberg.