Hanwha, Poongsan call off $1 bil. ammunition biz M&A deal

Poongsan Group Chairman and Federation of Korean Industries Chairman Ryu Jin, right, attends a luncheon held by President Lee Jae Myung for his French counterpart Emmanuel Macron at Cheong Wa Dae in Seoul, April 3. Yonhap

Korea’s top defense firms Hanwha Aerospace and Poongsan have called off negotiations for Hanwha's acqusition of the Poongsan's ammunition business, triggering speculation over the reasons behind the cancellation.

Hanwha Aerospace said in a regulatory posting on Thursday night that it has halted its review of the acquisition. Poongsan also said in a similar filing that it is not pursuing the sale of its ammunition business.

The two companies did not elaborate further about why negotiations collapsed.

The stock price of Poongsan Holdings, the largest shareholder of Poongsan, plunged by 14.48 percent on Friday to 46,350 won, as investors reacted to the deal's collapse.

The deal, valued at 1.5 trillion won ($1 bil.), drew significant industry attention as it was seen as an opportunity to address both companies’ needs.

Poongsan, headed by Federation of Korean Industries Chairman Ryu Jin, is Korea’s primary military ammunition manufacturer, producing a wide range of munitions including 5.56-millimeter small-caliber rounds, 155-millimeter artillery shells, missile warheads and even sports ammunition.

Since receiving its government license in 1973, the company has maintained a dominant position in the ammunition business, establishing a supply chain spanning explosives materials to finished products.

Poongsan’s two main business pillars are copper alloys and ammunition. The former accounts for about 70 percent of the company’s sales, but ammunition generates roughly 70 percent of its operating profit.

For Hanwha Aerospace, taking over Poongsan’s ammunition business was an opportunity to expand its portfolio across the defense sector. Despite being Korea’s leading defense systems manufacturer, known for the K9 self-propelled howitzer and the Chunmoo multiple rocket launcher, it has relied on external suppliers for ammunition, including 155-millimeter shells for the K9.

Hanwha Aerospace participated as the sole bidder for the ammunition business and submitted its final proposal on April 3. The two sides had since been engaged in negotiations, with talks reportedly advancing to price negotiations, but the deal was abruptly called off just six days later.

Poongsan ammunition rounds / Captured from Poongsan's website

While neither side disclosed why negotiations broke down, industry officials attributed the collapse to the unique circumstances faced by the two companies.

Poongsan’s sales bid was widely interpreted to be related to succession issues within the group's leadership. Ryu’s eldest son, Royce Ryu, is a U.S. citizen, and Korea’s Defense Acquisition Program Act states that foreign nationals must obtain government approval to hold management control of defense companies, effectively limiting ownership to Korean nationals.

The younger Ryu may still attempt to gain Korean citizenship, but would then have to address issues related to the country's mandatory military service. If authorities determine that his change of nationality was intended to avoid conscription, the Ministry of Justice can refuse to grant him citizenship.

Selling the business to Hanwha Aerospace, a fellow defense company, was seen as a less controversial but still challenging option for Poongsan.

Given Poongsan’s dominant position in Korea’s ammunition market, Hanwha’s acquisition would have been subject to review by the Fair Trade Commission. Concerns have been raised that if Hanwha were to acquire Poongsan’s ammunition unit, it could potentially harm competitors by controlling the supply and pricing of key artillery shells for the Korean military.

The company’s shareholder structure also posed a challenge. Poongsan Holdings owns about 38 percent of the company, while the National Pension Service holds around 8 percent and minority shareholders account for roughly 45 percent. This makes it difficult to secure the two-thirds shareholder approval required for the sale.

Poongsan attempted to spin off its ammunition business in 2022, but withdrew the plan as a result of strong opposition from labor unions and minority shareholders, who argued that the plan would undermine shareholder value.

Hanwha Aerospace's K9 self-propelled howitzer / Courtesy of Hanwha Aerospace

The situation was also challenging for Hanwha.

If Hanwha Aerospace were to acquire Poongsan, it would need to navigate political and regulatory hurdles, including required government approvals. However, retail investor sentiment towards Hanwha Group has been complicated by backlash to its affiliate Hanwha Solutions over a rights issue, prompting the Financial Supervisory Service to order Hanwha Solutions to revise its prospectus for issuing new shares, halting the process.

Industry officials suggest that government authorities may find it difficult to grant Hanwha a dominant position in the domestic ammunition market.

“Whenever there was a merger and acquisition case involving a defense company, there have been concerns about Hanwha Group’s potential monopoly,” an industry official said. “Pricing issues could have played a role in the deal’s breakdown, but there are also chances that non-financial circumstances played a role.”