Hanwha tapped as main suitor for Hyundai Rotem

Hyundai Rotem's K1E1 battle tank / Courtesy of Hyundai Rotem

By Kim Hyun-bin

• Published Jun 25, 2020 5:23 PM KST
• Updated Jun 26, 2020 8:37 PM KST

By Kim Hyun-bin

Despite denials by Hyundai Motor Group over its possible plan to sell off Hyundai Rotem, the country's train and defense equipment manufacturer, sources familiar with the issue said Hyundai still has an interest in unloading the defense equipment affiliate as Rotem continues its dismal performance.

Now, attention has shifted to a new potential buyer, with sources contacted by The Korea Times saying Hanwha Defense is being weighed as the viable candidate.

In terms of financial sheets, Hyundai Rotem isn't attractive. But that also means if a firm is hoping to increase its presence in the defense industry, Rotem's snowballing deficit will help candidates when it comes to price negotiations.

Last year, Hyundai Rotem's total sales reached 1.3 trillion won but the firm suffered an operating deficit of 279 billion won ($231.8 million). Although sales have increased 11 percent, the operating deficit jumped 41 percent from the previous year. The increase in the deficit came from the railway and industrial plant sector, while the defense unit's profitability also fell compared to previous years, leading to further accumulated losses.

“In the past two years, the company's railway and plant equipment sectors suffered major losses and the company was reviewing whether to sell off the equipment plants last year,” a Hyundai Rotem official said. “But we have never considered selling our defense business, which has been creating profits for the company over the years.”

Last year, Hyundai Rotem reeled in 9 billion won in operating profit becoming the only division of the company that recorded a surplus. Hyundai Rotem's largest shareholder is Hyundai Motor with 43.36 percent of the shares.

Hanwha Defense manufactures similar ground weapons such as river-crossing equipment and other conventional weaponry.

Earlier this year, Hyundai Motor Group held discussions with Hanwha Defense of the possible acquisition but Hanwha withdrew from the deal as it was deemed to lack synergy between the two firms and believed Hyundai's defense business was unsuitable for future growth, the sources said.

Hanwha Group is in a transition to develop more high-tech weaponry by reducing its heavy reliance on conventional weapons, which Hyundai Rotem has been focused on manufacturing.

Even though Hanwha has plans to acquire Hyundai Rotem, the company will not show interest till the very end as signs of an M&A could push up the company value, they said.

Unsurprisingly, Hanwha Defense flatly denied ever taking part in the negotiations let alone reviewing the possible acquisition. “We have not reviewed any plans to acquire Hyundai Rotem,” a Hanwha Defense official said.

Hanwha's name has been brought up for most M&A deals related to defense here as in the past it has been keen on strengthening its defense manufacturing capabilities through M&As. Hanwha Group has found visible success in M&As over the years and through it the conglomerate's defense division has become a key pillar for future growth.

In 2015 Hanwha acquired Samsung Thales, which are now Hanwha Systems. In 2016, the conglomerate took over Doosan DST, which is now Hanwha Defense, to become country's leading defense manufacturer.

Through the mergers Hanwha Group continuously fostered in the defense industry well positioning their products acquiring major deals with the Korean government and overseas.

“Hanwha has been successful in the defense sector through M&As although in the beginning the industry thought it was a bad decision for the company to acquire Samsung Thales and Doosan DST,” an industry official said. “But through Hanwha's swift management they were able to recover and now stand as the country's leading defense manufacturer.”