SEOUL -- Korean Air Lines says it will take over smaller rival Asiana Airlines in a government-backed deal aimed at helping the country's two largest carriers survive the coronavirus pandemic.
On Monday, KAL announced that it will buy 1.5 trillion won ($1.35 billion) worth of new shares in Asiana and 300 billion won of its corporate bonds, giving it a 63.9% stake in the smaller airline. To fund the move, KAL will raise 2.5 trillion won from its shareholders, including 730 billion won from its parent company Hanjin KAL.
Earlier the same day, state-run lender Korean Development Bank announced it would help bankroll the takeover by investing 800 billion won in Hanjin KAL, which will use the money to buy new shares in KAL. KAL will in turn use those funds to buy Asiana shares.
"We realized that without restructuring in the aviation industry it is unclear whether the flag carriers would survive even after the coronavirus pandemic ends," KDB said in a statement. "With the deal, the integrated flag carrier will be one of the top 10 global airlines."
The takeover, backed in part by taxpayer money, highlights Seoul's concern over the future of the aviation industry as well as its hopes that a bigger, more powerful national flag carrier will be able to navigate a turbulent post-pandemic era for global aviation.
KAL and Asiana were both struggling with poor earnings and heavy debt even before the pandemic. KAL posted a 619.5 billion won net loss in the first half this year, widening its loss from 482 billion won a year ago. Asiana's net loss was 633.3 billion won for the January-June period, up from 378 billion won of net loss year-on-year.
Analysts say the deal could help Hanjin Chairman Cho Won-tae strengthen his grip on Hanjin KAL as he attempts to fend off a challenge from an alliance of shareholders, led by activist fund Korea Corporate Governance Investment, that owns a combined 46.7% stake in the holding comapny. Chairman Cho and his family have 41.3% stake.
"We expect KDB's investment could give Chairman Cho Won-tae's side an edge. If KDB buys a stake in Hanjin KAL stake with new shares issued for the third-party investor, the size of the stake held by Chairman Cho and his allies will likely outweigh that of the alliance," said Choi Nam-kon, an analyst at Yuanta Securities.
KCGI, meanwhile, says it opposes the deal, arguing that a merger of the two airlines would threaten employees' job security. The activist fund has demanded talks with the government and creditors to discuss the matter.
The announcements come two months after a $2.2 billion acquisition deal between Kumho Industrial, Asiana's parent, and Hyundai Development Company collapsed. HDC, a mid-sized builder, gave up on buying Asiana in September as the coronavirus pandemic devastated the airline industry.
KDB, a main creditor of Kumho, has been looking for a Plan B since then.
Shares of KAL jumped 23.2% in Monday afternoon trading on the expectation that the merger will boost its value. Asiana Airlines' shares hit the upper daily limit of 30%.