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(LEAD) Jeju Air's Eastar takeover on brink of collapse amid pandemic

Economy 19:09 July 02, 2020

(ATTN: ADDS Eastar official's comments in paras 6-7)

SEOUL, July 2 (Yonhap) -- Jeju Air Co.'s planned takeover of smaller budget carrier Eastar Jet Co. appears to be on the brink of falling through as Jeju Air asked Eastar Jet to settle all of its debts by mid-July to proceed with the deal.

In March, Jeju Air signed a deal to acquire a controlling 51.17 percent stake in Eastar Jet from Eastar Holdings for 54.5 billion won as part of its expansion strategy despite the new coronavirus' growing impact on the airline industry.

In a letter sent to Eastar on Wednesday, Jeju Air called on Eastar to pay off all of its debts estimated at up to 100 billion won (US$83 million), including unpaid wages to its employees, delayed payments to subcontractors and office operating expenses, by July 15, a tall order that cannot be met by cash-strapped Eastar Jet.

"We sent a letter to Eastar yesterday to demand overall debt payments in the following 10 working days. Unless Eastar meets our requirements, we could notify them that the deal is no longer valid," a Jeju Air spokesman said over the phone.

But the company did not clarify the value of the unpaid debts.

This photo, taken on July 1, 2020, shows Jeju Air and Eastar Jet's planes at Incheon International Airport in Incheon, just west of Seoul, amid the coronavirus outbreak. (Yonhap)

In response, Eastar immediately sent a letter to Jeju Air on Thursday to explain its current financial status and seek understanding from the country's biggest budget carrier over the unpaid debts, Eastar Senior Vice President Kim You-sang told Yonhap News Agency by phone.

"Jeju Air just asked Eastar to pay off all the debts that were generated since March, without stating the value of debts we have to settle," Kim said.

If Jeju Air does not accept Eastar's explanation, the acquisition deal is widely expected to be scrapped.

Jeju Air's 10-day ultimatum comes days after Eastar pressed Jeju Air to push ahead with its acquisition process.

On Monday, Eastar Jet Chief Executive Choi Jong-gu said the airline's founder Rep. Lee Sang-jik of the ruling Democratic Party and his family will put their entire 38.6 percent stake in the hands of the budget carrier in a move to bring Jeju's stalled takeover plan back on track.

Rep. Lee's son and daughter collectively own the 39.6 percent stake in Eastar Jet through Eastar Holdings. The value of their Eastar stake reaches 41 billion won (US$34 million).

Jeju Air was expected to complete the deal by June 29 because the country's biggest budget carrier said in April it will issue 10 billion won worth of convertible bonds on June 30, one of the prerequisites for the takeover. Eastar Holdings was planning to purchase the bonds, which can be converted into Jeju Air equities.

But the bond issuance has been delayed, with the date to be set later according to an agreement from both sides.

In this photo, taken on June 29, 2020, Eastar Jet CEO Choi Jong-gu (2nd from L) listens to questions from a reporter during a press conference held at its headquarters in Gangseo, western Seoul, over its founding family's stake donation plan to pressure Jeju Air to proceed with its planned takeover of Eastar. (Yonhap)

Behind the delay in the acquisition process were deep-running differences between the two sides over acquisition terms.

Eastar Jet said it suspended all of its flights and sent all of its 1,700 employees on "paid leave" in late March as Jeju Air said it will guarantee wages for them after the signing the same month. But Jeju Air changed its position in May with the worsening COVID-19 pandemic, according to Eastar Jet.

But Jeju Air balked at Eastar Jet's argument, claiming that the Eastar's management made the decision to halt all flights and sent its employees home without paying wages.

To wrap up the deal, Jeju Air has to obtain approval from Vietnam and Thailand, which are still reviewing the proposed takeover.

Jeju Air has said the acquisition will help it gain a bigger market share and strengthen the company's competitiveness in global markets.

South Korea has two full-service carriers -- Korean Air Lines Co. and Asiana Airlines -- and seven low-cost carriers -- Jeju Air, Jin Air Co., Air Busan Co., Air Seoul Inc., Eastar Jet, T'way Air Co. and Fly Gangwon.

AK Holdings, the holding firm of South Korean retail conglomerate Aekyung Group, holds a 56.94 percent stake in Jeju Air.

On Thursday, Jeju Air jumped 6.9 percent to 16,950 won, and AK Holdings climbed 4.4 percent to 19,100 won, outperforming the broader KOSPI's 1.4 percent gain.

kyongae.choi@yna.co.kr
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