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South Korea's airline M&A left adrift by the pandemic

Asiana deal in danger as Jeju Air cancels Eastar Jet purchase

Asiana logged a 292 billion won operating loss in the first quarter of 2020 as the coronavirus hit air travel hard. (Photo by Rie Ishii) 

SEOUL -- The coronavirus pandemic has already derailed one major acquisition in South Korea's airline industry, now a second hangs in the balance.

HDC Hyundai Development, a midsize building company spun off from the Hyundai group, has been looking to break into aviation by purchasing Asiana Airlines, the country's second-largest carrier. In late December, HDC Chairman Chung Mong-gyu, supported by the country's largest brokerage house Mirae Asset Daewoo, signed a deal to purchase a controlling stake in Asiana for 2.5 trillion won ($2.2 billion) from Kumho Industrial.

Chung was betting on the deal to boost his company's brand and reputation in the global market, as well as fulfill a personal ambition. The chairman -- who managed Hyundai Motor two decades ago -- before his cousin took the helm, has also spoken of his dream of turning HDC into a mobility solution company. 

The deal was also expected to create synergy effects as HDC entered the duty-free and resort businesses. 

But just months after the signing, the coronavirus pandemic decimated air travel demand, both domestic and global.

Asiana was hit hard, grounding many of its 85 aircraft and logging a 292 billion won operating loss in the first quarter, a sharp reverse from the 7 billion won operating profit a year ago. The company has not yet released its second-quarter earnings.

The drastic upheaval led HDC to demand last week that Kumho conduct a second round of due diligence on Asiana this month to recalculate the carrier's debt and review its financial documents. Its debt-to-equity ratio reached 6,280% in the first quarter as its net loss soared 662% year-on-year.

But the Korean Development Bank announced on Monday that it will not accept the request. The state-run lender leads creditors who have lent hundreds of billions of won to Kumho. These creditors were hoping to sell the stake in Asiana in order to recover their loans.

"The request for conducting due diligence once more is excessive. Basically, we cannot accept this," said KDB Vice President Choi Dae-hyun in a press briefing. "[Hyundai Development] wants to just delay the deal with no intention to acquire it because it has not come to the table for negotiations so far."

Hyundai, for its part, voiced concern that Kumho would move to terminate the deal and said it only wants more clarity. It would be "building a house on sand" to go ahead with the deal without a better view of Asiana's situation, Hyundai said.

"It is very clear that both HDC Hyundai Development and Asiana Airlines will fall to the crisis of bad loans together if the deal is concluded without reasonable examination of situations and reactive strategy based on the procedure," Hyundai said.

With the fate of the deal in question, the government has not ruled out nationalizing the carrier. Financial Services Commission Chairman Eun Sung-soo said injecting state funds is possible if the deal collapses.

"If the deal collapses, Asiana Airlines is eligible to apply for the Stabilization Fund for Key Industries," Eun told lawmakers at the National Assembly last week. "But the decision should be made at the [Fund] Review Committee."

Shares of Asiana jumped on the news. Asiana soared 20.65% on July 28 as investors bet on the carrier's stable management following the government's bailout fund. It rose more than 3% on Monday as chances for the deal collapse is increasing.

South Korea's airline industry as whole has taken a beating, and even local leader Korean Air Lines is also struggling to survive. KAL said last month that it is in exclusive talks with Hahn & Co., a local private equity fund, to sell its in-flight catering and duty-free sales business. 

The Asiana deal would not be the first casualty of the pandemic. Jeju Air, the country's largest budget carrier, terminated a 54.5 billion won deal to buy its smaller rival Eastar Jet two weeks ago. Jeju said the deal collapsed because Eastar's major shareholder did not correct its significant violation of the deal's terms by the end of the deadline.

Jeju Air said it faces too much uncertainty surrounding the deal for it to proceed.

The agreement reached in March stipulated that Eastar resolve concerns including roughly $20 million in unpaid wages, among other debts. But the carrier, which shut down operations in March due to the pandemic, was unable to come up with the money.

Rep. Lee Sang-jik of the ruling Democratic Party, a businessman-turned-lawmaker, offered to donate his stake in Eastar to cover the debt and wages. However, Eastar's capital was impaired by 104.2 billion won as of March 31 with its debt reaching 218.7 billion won. The Lee family's stake, as a result, has no value.

Local media reported that Eastar plans to file a lawsuit against Jeju for breaking up the deal. Representatives for Eastar were not available for comment. 

Asiana's future, meanwhile, is still unclear as many risks are weighing on the company, analysts say.

"It will take considerable time until the company improves its financial health. There are still many uncertainties in the second half of this year, although the company is expected to have better performances in the second quarter," said Bang Min-jin, an analyst at Eugene Investment & Securities. "Asiana is expanding its passenger business by launching some international routes since June, but it can feel the burden in the costs if passenger demand does not recover."

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