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(LEAD) Court ruling clears 1st hurdle for Korean Air's Asiana takeover

All News 15:44 December 01, 2020

(ATTN: ADDS court's comment in 4th para, details and background throughout)

SEOUL, Dec. 1 (Yonhap) -- A South Korean court on Tuesday rejected an injunction filed by a local equity fund against Hanjin KAL's stock sales meant to fund its affiliate Korean Air Lines Co.'s takeover of smaller rival Asiana Airlines Inc., clearing one of the hurdles for the largest deal ever in the airline sector.

The Seoul Central District Court dismissed the injunction filed by the Korea Corporate Governance Improvement (KCGI) against Korean Air's parent Hanjin KAL's stock sales worth 800 billion won (US$723 million) to Asiana's main creditor Korea Development Bank (KDB).

The KCGI brought the issue to the court last month, arguing that the share sale to the designated third party will damage the Hanjin Group holding firm's existing shareholders' value.

"The planned rights issue appears to be in line with Hanjin Group's plan to acquire Asiana and operate an integrated airline, not aimed at protecting the current Hanjin management's control of the group," the court said in a statement.

The image shows an Asiana Airlines passenger jet against the background of the Kumho Asiana Group and Korean Air headquarters. (Yonhap)

Among other hurdles to be cleared, the merger between the two airlines requires approval from antitrust authorities in at least four countries -- the United States, the European Union, China and Japan.

Last month, Korean Air said it will raise 2.5 trillion won via rights offerings early next year.

Of the proceeds, the country's biggest carrier will spend a total of 1.8 trillion won -- 1.5 trillion won for new shares to be sold by Asiana and 300 billion won for Asiana perpetual bonds -- to acquire the second-biggest one.

Hanjin KAL is set to inject the 800 billion won into the Korean Air's rights issue to help the national flag carrier take over Asiana in a deal that would create the world's 10th-biggest airline by fleets.

Under the investment agreement signed last month between the KDB and Hanjin KAL, Cho Won-tae, chairman of Hanjin Group and Korean Air, agreed to provide all of his 6.52 percent stake in Hanjin KAL valued at 170 billion won as security to creditors.

The KDB said it has the right to sell the stake offered by Cho and have him quit the chairman position if the combined carrier fails to meet expectations in terms of performance and post-merger integration.

But the KCGI, the biggest shareholder in Hanjin KAL, expressed concerns that Hanjin KAL may suffer financial damage unless the deal goes as planned, though the KDB said the holding firm will not have to pay compensation for any damage under the agreement.

The legal dispute comes as the three-party alliance led by the chairman's elder sister Cho Hyun-ah, who gained global notoriety for the "nut rage" incident in 2014, took issue with the Asiana takeover plan.

Chairman Cho, 44, had sparred with Hyun-ah, 45, as she formed the alliance with the KCGI and local builder Bando Engineering & Construction Co. in January.

The alliance argued that inviting a professional manager would improve Hanjin Group's management, financial status and shareholder value.

But the alliance failed to dethrone the chairman and appears to have been preparing to oust Chairman Cho at Hanjin KAL's shareholders meeting in March next year.

The alliance has recently increased its combined stake in Hanjin KAL to 46.71 percent, higher than the 41.3 percent held by Won-tae, his mother, younger sister, related parties, Delta Air Lines, Inc. and Kakao Corp., the operator of the country's leading messaging app.

This illustrated image shows Hanjin Group Chairman Cho Won-tae (R) and his elder sister Hyun-ah with Hanjin Group's logo in the background. (Yonhap)

But the KCGI's attempt to oust the chairman may not be easy, as the KDB will have a 10.66 percent stake in Hanjin KAL after investing the 800 billion won in the holding firm.

Korean Air will become Asiana's biggest shareholder with a 63.9 percent stake if the acquisition is completed.

In September, Asiana's creditors ended a drawn-out deal to sell Asiana to a consortium led by HDC Hyundai Development Co. due to differences over terms of the 2.5 trillion-won deal amid the pandemic.

Hit hard by the COVID-19 pandemic, Korean Air and Asiana have suspended most of their flights on international routes since March, and travel demand has dried up.

Korean Air's net losses narrowed to 651.84 billion won from January to September from 707.14 billion won in the year-ago period as it focused on winning more cargo delivery deals to offset a sharp decline in travel demand.

But Asiana's net losses deepened to 623.85 billion won from 524.14 billion won during the same period.

Korean Air and Asiana collectively have 247 aircraft, exceeding Air France's 220 but falling behind Lufthansa Deutsche Lufthansa AG's 280.

Korean Air had 22.46 trillion won in debt on assets worth 25.51 trillion won as of the end of September, while Asiana held debts worth 11 trillion won on assets worth 12.34 trillion won at the end of June.

In the process of the deal, Asiana's heavy debts would remain another drag on Korean Air's proposed takeover.

Meanwhile, KCGI has recently demanded that Hanjin KAL hold an extraordinary shareholders meeting to have the current board members take responsibility for the decision to acquire Asiana and select new directors.

The fund plans to seek changes in the articles of association to improve the governance structure at Hanjin KAL at the shareholders meeting possibly to be held early next year.

On Tuesday, Korean Air rose 3.3 percent to 26,350 won, and Asiana jumped 11 percent to 5,720 won, outperforming the broader KOSPI's 1.7 percent gain.


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