South Korean shipbuilding giant Hanwha Ocean faces uphill battle to secure Austal for $1 billion

South Korean shipbuilding giant Hanwha Ocean faces uphill battle to secure Austal for $1 billion

Photo: Austal, via Facebook

Australian shipbuilder Austal (ASX: ASB) is in the sights of South Korean giant Hanwha Ocean Co which is looking to launch a $1 billion bid for the Perth-based company – although the Austal board has already noted that the bid is unlikely to secure the necessary regulatory approvals to succeed.

However, Hanwha Ocean has hit back at that suggestion, calling it “baseless”, while describing itself as “a credible buyer with a highly competitive offer”.

Austal today confirmed that it has received an unsolicited, conditional and non-binding proposal from Hanwha comprising $2.825 cash per share – a 28.4 per cent premium to the previous close of $2.20 per share last Thursday.

News of the indicative proposal pushed Austal’s stock more than 11 per cent higher today to a peak of $2.46 in early trading – well short of the offer price.

Hanwha Ocean, which was formerly known as Daewoo Shipbuilding & Marine Engineering, is among three major shipbuilders of South Korea that include Hyundai and Samsung.

But the bid by Hanwha for Australia’s largest defence equipment exporter is fraught with regulatory and security hurdles, including essential approvals from the US military.

The security hurdles were raised even higher in November last year when Austal signed a memorandum of understanding with the federal government and the Department of Defence through which the parties are negotiating an agreement to make Austal the government’s “strategic partner for vessels” to be constructed in Western Australia.

Austal notes that the agreement secured with the Australian Department of Defence is predicated on “a sovereign and enduring naval shipbuilding and sustainment industry at Henderson (being) central to the government’s commitment to ensuring continuous naval shipbuilding in Australia and delivering the capabilities needed to keep Australians safe”.

Austal adds that Hanwha’s proposal is not only subject to approvals from Australia’s Foreign Investment Review Board (FIRB), but also from the Committee on Foreign Investment in the United States and the US Defense Counterintelligence and Security Agency.

“Austal invests considerable time and resources into deciding whether it should grant a potential purchaser access to the company’s otherwise confidential detailed financial records, forecasts and contracts as part of a due diligence process,” says Austal in a statement to the ASX.

“In doing so, it assesses a range of factors, including but not limited to the potential for shareholder value creation, competition concerns and a potential purchaser’s ability to ultimately complete a transaction (which would include necessary government approvals).

“This latter consideration is particularly relevant in relation to the proposal from Hanwha, given Austal’s position as the designer and builder of defence vessels for the Australian and US navies and ownership clauses associated with defence contracts.”

While Austal has considered the indicative proposal and engaged with Hanwha to determine its prospects of gaining regulatory approvals in Australia and the US, the company says it is “not satisfied that these mandatory approvals would be secured”.

“However, the company is open to further engagement if Hanwha is able to provide certainty on whether a transaction would be approved,” says the company.

In a statement issued by Hanwha Ocean, executive vice president David Kim says that “there is no foundation of the claim that the Foreign Investment Review Board would reject Hanwha’s acquisition of the company”.

“Hanwha has already obtained FIRB approval for prior investments in Australia and has a proven track record of investment in Australia’s defence industrial base, being the contracted supplier of infantry fighting vehicles, self-propelled howitzers and ammunition resupply vehicles with significant investment in a Geelong manufacturing facility that employs local workers,” says Kim.

Hanwha says it “brings important capabilities and investment to support Austal’s business and local Australian communities while aligning with government objectives in Australia, the US and South Korea”.

Austal has advised its shareholders that they are not required to do anything in relation to the indicative proposal.

The shipbuilder, which rebounded to a $12 million net profit in the first half of FY24, has an order book totalling $12.7 billion, supported by a number of major Australian Defence contracts.

The order book has increased by $5.8 billion over the past year with CEO Patrick Gregg noting that Austal is focused on “capturing opportunities that AUKUS and the Australian Government’s Surface Fleet Review will provide”.

Austal generated revenue of $717.7 million in the first half of FY24, down from $775 million a year earlier due to fewer commercial vessel awards during FY23 and the first half of FY24.

Austal’s US shipyard, located in Mobile, Alabama, accounted for 81 per cent of total revenue in the period compared to 73 per cent in FY2023 H1, with revenue from Australasia down to 19 per cent.

The company, which had 40 ships either scheduled or under construction at the end of FY23, is targeting revenue growth in FY24 of between 8 and 10 per cent on the $1.59 billion posted last financial year.

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