Hanwha Aerospace (Hanwha Aero) is pushing for a capital increase of 3.6 trillion won, amid analyses that the background is a strategy for management succession. Before announcing the capital increase, Hanwha Aero nearly exhausted its cash reserves and acquired a 7.3% equity stake in Hanwha Ocean from Hanwha Energy and Hanwha Impact Partners for about 1.3 trillion won. The industry interprets this as an effort to resolve the '30% rule' under the Monopoly Regulation and Fair Trade Act, which requires subsidiaries to hold more than 30% of the equity in their subsidiaries.

According to industry sources on the 24th, Hanwha Aero purchased a 7.3% equity stake in Hanwha Ocean, held by Hanwha Impact Partners (5.0%) and Hanwha Energy (2.3%), at 58,100 won per share, totaling 1.3 trillion won, on the 13th. As a result, Hanwha Aero's equity stake in Hanwha Ocean rose to 30.44%. Hanwha Aero stated that it acquired the equity "to enhance business synergy as a global top-tier player in the defense and shipbuilding sectors, as well as to increase corporate value through global export expansion."

Graphic=Son Min-kyun
Graphic=Son Min-kyun

One week after acquiring the equity stake in Hanwha Ocean, on the 20th, Hanwha Aero decided on a capital increase of 3.6 trillion won, stating that it would invest in expanding overseas production bases and increasing domestic defense capabilities. In the last year, Hanwha Aero recorded revenue of 11.24 trillion won and operating profit of 1.73 trillion won, with a backlog of more than 32 trillion won in orders, but has largely depleted its cash reserves due to the acquisition of the equity in Hanwha Ocean. According to Hanwha Aero's business report, cash and cash-equivalent assets amounted to about 1.375 trillion won at year-end, indicating that most (94.5%) was used for this acquisition.

In May 2023, Hanwha Group acquired Hanwha Ocean with an investment of about 2 trillion won from five affiliates, including Hanwha Aero, Hanwha Systems, Hanwha Impact Partners, and two subsidiaries of Hanwha Energy. Subsequently, Hanwha Ocean underwent a capital increase but still retained stable management control with 46.28% equity held by affiliates of Hanwha Group.

Nevertheless, the acquisition of equity in Hanwha Ocean by Hanwha Aero, having nearly exhausted its cash and cash-equivalent assets, is interpreted as an effort to meet the '30% rule.' The current prominent succession scenario within Hanwha Group involves a merger between the non-listed Hanwha Energy, in which the three brothers hold equity, and Hanwha, the parent company at the peak of the group. Hanwha Energy is 50% owned by eldest son Kim Dong-kwan, with the second and third brothers, Kim Dong-won, president of Hanwha Life, and Kim Dong-sun, vice president of Hanwha Galleria, each holding 25% equity.

Under current fair trade law, a holding company must own more than 30% of its listed subsidiary's equity, and a subsidiary must hold more than 30% of its listed subsidiary's equity. Hanwha, the holding company of Hanwha Group, holds 33.95% of Hanwha Aero's equity, and Hanwha Aero has increased its equity stake to 30.44% with this acquisition. Following this acquisition of Hanwha Ocean's equity by Hanwha Aero, Hanwha Energy will be able to comply with the 30% rule in the equity structure transitioning from Hanwha Aero to Hanwha Ocean even after merging with Hanwha.

Hanwha Energy, owned by the three brothers of Hanwha Group, holds 22.15% of Hanwha's equity. The largest shareholder of Hanwha is Chairman Kim Seung-yeon, who has 22.65% equity, and Hanwha is the largest shareholder of key affiliates within the group, including Hanwha Aero, Hanwha Solutions, Hanwha Life, Hanwha Galleria, and Hanwha Hotels & Resorts. The three brothers hold only 4.91%, 2.14%, and 2.14% of Hanwha's shares, respectively.

To secure control over their group's affiliates, the three brothers need to merge Hanwha with Hanwha Energy. Last July, Hanwha Energy purchased 5.2% equity of Hanwha through a public stock buyback and in November acquired 7.25% equity from Korea Zinc for about 150 billion won, thereby increasing its influence.

Currently, Hanwha serves as the holding company within the group but is not legally classified as a holding company. According to fair trade law, a holding company's requirements are that the 'total asset value on a separate basis in the balance sheet' exceeds 500 billion won and that 'the sum of subsidiaries' equity value must be at least 50% of the total asset value (holding ratio).

Although Hanwha has total assets exceeding 500 billion won, Hanwha Group has thus far avoided transitioning to a holding company by restructuring its governance to directly manage its construction and other business sectors, as there have been no practical benefits from this transition. Hanwha can already control all its affiliates through Hanwha, and transitioning to a holding company would subject it to restrictions, such as being prohibited from owning financial affiliates, necessitating the sale or separation of them within two years.

Hanwha Group is expected to transition to a holding company structure to secure management control over the businesses handled by the three brothers during the succession process. Industry insiders anticipate that, following the merger of Hanwha Energy and Hanwha, the group will restructure its governance to meet holding company requirements and that the three brothers will partition the companies for corporate separation.

Recently, Hanwha Energy has been accelerating its initial public offering (IPO) process by selecting underwriters for listing. Industry analysts expect that the funds secured through the IPO will be used to increase its equity stake in Hanwha, thereby enhancing its control.

A representative of Hanwha Group noted that "the acquisition of equity in Hanwha Ocean by Hanwha Aero was part of the restructuring for the expansion of the marine defense business," and stated, "There are no plans for a merger between Hanwha and Hanwha Energy."