Merger mania spreads in Korea as markets remain challenging

A ceremony to celebrate the merger of Lotte Confectionery and Lotte Foods was held on July 5, at Lotte Hotel World in Songpa Distrcit, southern Seoul. [LOTTE CONFECTIONERY]

Large companies in Korea are seeking to merge subsidiaries and companies in which they have investments in an effort to streamline and strengthen operations amid economic uncertainties, though they have to sell the case for consolidation to shareholders and the market.

Hanwha Aerospace, Hanwha Defense, and Hanwha Corporation's defense division became the latest to consider mergers, according to local media reports last Thursday.

The company is considering various options including mergers "in order to enhance corporate value," Hanwha Aerospace said in an electronic disclosure released Thursday, though it emphasized nothing has been decided yet.

The decision is expected to be made in a month.

Hanwha Corporation owns 33.95 percent of Hanwha Aerospace, an aircraft engine maker, and is the largest shareholder. And Hanwha Defense, which sells a broad range of defense-related products, including artillery systems, armed vehicles and air defense systems, is a wholly owned subsidiary of Hanwha Aerospace.

"Some people from outside the company consider the push for the merger is to achieve economies of scale," said a Hanwha Corporation spokesperson. "But at the current stage, we cannot say anything decisively."

Posco Holdings is also mulling a similar approach with its liquefied natural gas (LNG) companies.

"We are going through an internal review on the merger of Posco International and Posco Energy," said Chon Jung-son, Posco Holdings co-CEO, during a conference call on the quarterly earnings report on Thursday, though he added that nothing has been decided at this point.

Posco Holding owns 62.91 percent of Posco International, a trading company specializing in purchasing and selling LNG, and 89.0 percent of Posco Energy, operator of LNG plants.

On July 1, Lotte Confectionery merged with Lotte Foods, four months after the merger plan was announced.

Lotte Confectionery, the surviving entity, ended up with an ice cream market share of 45.2 percent through the merger, the largest in the market. The surviving company's annual revenue totaled 3.7 trillion won ($2.8 billion) in 2021, No. 2 among local food companies following CJ CheilJedang.

"Through the merger, both companies were able to not only expand their field of businesses but also enhance efficiency, scale up resources for future investments and create synergy in marketing," said Lotte Confectionery CEO Lee Young-goo during the inauguration ceremony of the resulting company on July 5.

Ottogi, a ramen maker, released an electric disclosure on July 18 saying that it will absorb Ottogi Ramen Holdings and Ottogi Logistics Service Holdings "to simplify and enhance the integrity of the corporate ownership structure."

Ottogi Ramen Holdings, 37.7 percent owned by Ottogi, has been making most of its profit through transactions with Ottogi. The food company also hopes that the merger would make its supply chain more stable.

The merger will be completed by October.

"Rate hikes and other factors drove economic uncertainty, and the outlook on the capital market remains grim," said a source at a private equity firm.

The source said that is why some companies are trying to acquire or merge with cash-rich related companies, as the raising of external funds can be difficult.

These mergers are done for many reasons, such as addressing overlapping business lines or creating synergies, "but it might also have to do with issues related to stock held by shareholders with a special relationship to the company," said Hwang Yong-sik, business professor at Sejong University. "Therefore companies have to make a good case to persuade the shareholders and the market."

BY BAEK IL-HYUN, SHIN HA-NEE [shin.hanee@joongang.co.kr]