The disposal of Asiana Airlines is being delayed. On the face of it, the delay is because of the COVID-19 pandemic and a delayed approval of its business combination. However, some experts point out that HDC Hyundai Development Company is considering canceling the contract. They also point out that Korea Development Bank (KDB) has to be held accountable as a lead manager and a main creditor bank.
On April 29, HDC announced that it indefinitely postponed its old share acquisition from Asiana Airlines scheduled for April 30.
In fact, the delay was predicted previously. The consortium of HDC and Mirae Asset already put off their initial paid-in capital increase of 1,466.5 billion won from April 7. In addition, the date of payment for new shares has been changed to 10 days after the fulfillment of every prerequisite or an agreed date.
The prerequisites have drawn much attention since the indefinite postponement of old share acquisition. When the stock purchase agreement was concluded in December last year, HDC came up with seven requirements in order to acquire 30.77 percent shares from Kumho Engineering and Construction. Firstly, Kumho’s statements and guarantees in the agreement must accurate. Secondly, every commitment and obligation stipulated in the agreement must be fulfilled.
The requirements are also related to the presence or absence of a law or court ruling limiting the deal, approvals from various countries’ competition authorities, the completion of the initial paid-in capital increase, an approval at HDC’s shareholder meeting, and the presence or absence of a serious negative effect after June 30. New share acquisition comes with similar conditions.
Although HDC is still mentioning overseas business combination reviews, those in the industry do not agree. According to them, a material adverse change (MAC) occurred after Kumho Engineering and Construction and HDC concluded the stock purchase agreement in December last year. An MAC clause in an M&A contract can be defined as a self-rescue measure taken by the acquirer negotiating with insufficient management information and data.
In most cases, the MAC clause becomes effective based on two facts. One is the seller’s fault and the other is losses equivalent to at least 10 percent of the value of the contract. In the Asiana Airlines contract, the old share acquisition price is 322.8 billion won, which means the contract can be canceled in the event of approximately 32 billion won in losses. In other words, HDC can cancel the contract if such unexpected losses result from Kumho’s concealment or the like in the process of disposal.
Asiana Airlines’ financing in March 2019 is being mentioned as an MAC. At that time, the airline prepared 85 billion won by issuing perpetual bonds and 30 billion won went to its listed subsidiary. In doing so, it used Lime Asset Management’s private equity fund in order to circumvent the Commercial Act, which bans credit offering between a listed company and its parent company. The losses of the fund are currently estimated at over 50 percent. In addition, the Korea Fair Trade Commission is looking into the airline’s in-flight meals and the investigation may result in a fine.
This is why KDB is likely to be held accountable. In April last year, the bank and Kumho Group chairman Park Sam-koo agreed on selling Asiana Airlines with the bank guaranteeing his control over the other subsidiaries of the group such as Kumho Buslines and Kumho Engineering and Construction. KDB has managed the disposal as a main creditor bank since then and, as such, it cannot avoid its responsibility for what happened after the initiation of the process. Moreover, the bank cannot but bear the huge debts of Asiana Airlines if the stock purchase agreement is canceled. Then, an astronomical government fund will be poured again after the disposal contract cancelation between Hanwha Group and Daewoo Shipbuilding & Marine Engineering back in 2008.