Hanwha Group Chairman Kim Seung-youn (center) and Vice Chairman Kim Dong-kwan (left) examine a mock-up of a high-resolution synthetic aperture radar (SAR) satellite for Earth observation during a visit to Hanwha’s Jeju Space Center this past January. Photo courtesy of Hanwha Group
Hanwha Group held 14,273,300 shares of Korea Aerospace Industries (KAI) as of July 24. Compared with the previous reporting date of the 16th (13,262,470 shares), this marked an increase of 1,010,830 shares. The stake rose from 13.61% at the previous report to 14.64%, an increase of 1.03 percentage points. This more than quadrupled the stake from just 3.2% at the end of last year within seven months.
Hanwha Systems held a board meeting on July 8 and announced it would purchase KAI shares on the open market within a limit of 500 billion won by the end of the year. As Hanwha Aerospace exhausted its investment resources of nearly 1 trillion won early, Hanwha Systems is taking over the baton. If Hanwha Systems spends 500 billion won to buy more shares, the entire Hanwha Group’s KAI stake will rise from 12.44% to 15.64%.
By affiliate, Hanwha Aerospace holds 9.90%, Hanwha Systems 3.73%, and Hanwha Aerospace USA 1.01%. If Hanwha Systems invests the full 500 billion won and raises its stake to 4.73%, the Hanwha Group will further solidify its position as the second-largest shareholder of KAI, behind the Export-Import Bank of Korea (26.41%), the largest shareholder.
Hanwha Group expanded its share purchases from the end of last year, overtaking the National Pension Service (8.12%) to become KAI’s second-largest shareholder. The stake gap with the top shareholder, the Export-Import Bank of Korea (26.41%), has narrowed to 11.77 percentage points. The keenest interest is whether the stake will exceed 15%. If it does, Hanwha Group must file a business combination report and undergo intensive review by the Fair Trade Commission.
The defense industry widely expects Hanwha’s pace of stake expansion to accelerate further. This is because of the strong will of Hanwha Chairman Seung-youn Kim, who dreams of a “comprehensive space company,” and Vice Chairman Kim Dong-kwan, who seeks to grow into a “Korean Lockheed Martin.” After purchasing a 4.99% KAI stake in March this year, Hanwha officially designated its purpose of holding the shares as “management participation” two months later.
A business community official said, “There is a high possibility that Hanwha will increase its stake to more than 15% through expanding its KAI stake by the end of the year,” adding, “The recent moves can be seen as an effort to expand influence over KAI while leaving open the possibility of securing management control in the future.” At the group level, Hanwha is known to plan to expand its stake through Hanwha Systems to more than 15%, subject to business combination review, by the end of the year.
Hanwha Group’s Three Scenarios for KAI Merger
How likely is Hanwha, with its space and defense technology, to leap into a “Korean SpaceX” through a merger and acquisition (M&A) that combines with KAI’s aircraft development capabilities? Realistically, three main scenarios are being discussed.
First, the largest shareholder, the Export-Import Bank of Korea (Eximbank), sells its 26.41% KAI stake on the market, and Hanwha directly acquires it by adding a management premium.
In this case, Hanwha would instantly become KAI’s largest shareholder and leap into the nation’s largest defense company encompassing the aerospace industry. However, since KAI is a company funded by taxpayers, the premise is that the government must first make a policy decision on KAI’s privatization and secure a sale price sufficient to recover the public funds invested.
The second option is for Hanwha to acquire only the level of the Eximbank’s stake needed to secure top shareholder status. This is a compromise in which the government retains part of its stake while Hanwha secures management control. If corporate value rises after privatization, the government can sell its remaining stake at a higher price, which is also advantageous in terms of recovering public funds. Conversely, if the government continues to hold its stake, a European-style model in which the state remains a major shareholder of a strategic defense company, like Airbus and Thales, is also possible.
Finally, a de facto privatization scenario is being discussed in which the Eximbank remains the largest shareholder while Hanwha actively participates in management as the second-largest shareholder. Hanwha could strengthen strategic cooperation with KAI through participation in the board and management, and pursue export expansion and enhancement of corporate value. Since it participates in management without an acquisition process, it can reduce monopoly controversy, and there is also an assessment that it could be a realistic alternative to ease resistance from KAI’s labor union.
Trade Ministry Approval Required for Sale of Defense Company
There are also hurdles Hanwha Group must overcome for a KAI merger. If it acquires or merges immediately, it would rise to a monopolistic position and must pass the Fair Trade Commission’s business combination review. The biggest hurdle is a procedure requiring the mandatory approval of the Minister of Trade, Industry and Energy under Article 35, Paragraph 3 of the Defense Acquisition Program Act, as well as its enforcement decree and enforcement rules.
According to Paragraph 3, when a substantial change in management control is expected due to the sale, auction, acquisition, merger, or other reasons of a defense company, and it falls under the standards set by presidential decree, the party seeking to substantially acquire management control of the defense company must submit related documents in accordance with the presidential decree and obtain the prior approval of the Minister of Trade, Industry and Energy.
Furthermore, Paragraph 4 stipulates that when the Minister of Trade, Industry and Energy intends to grant approval under the provisions of the main text of Paragraph 3, the minister must consult in advance with the Commissioner of the Defense Acquisition Program Administration. Because the defense sector is directly linked to national security, the consent of DAPA is also required, with the aim of having the agency comprehensively review the impact of the defense company sale on defense materiel procurement and whether security requirements are met.
In sum, under Article 35, Paragraph 3 of the Defense Acquisition Program Act, Article 45, Paragraph 2 of its enforcement decree, and Article 31 of its enforcement rules, the review results of the Trade Ministry and DAPA must be reflected when acquiring management control of a defense company. In other words, the acquiring company must obtain the approval of both the Minister of Trade, Industry and Energy and the Commissioner of DAPA.
The approval procedure proceeds as follows: (1) application for approval of the defense company sale (company → Ministry of Trade, Industry and Energy), (2) consultation among relevant agencies (Ministry of Trade, Industry and Energy and DAPA), and (3) final decision on whether to approve the sale (Ministry of Trade, Industry and Energy). The most recent approval case was Hanwha Group’s (Hanwha Aerospace and other affiliates) acquisition of Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean) in 2023.
