Why is Korean Air’s criticism of ‘Dechaebol preferential treatment’ in promoting the Asiana merger?

A Korean state-owned bank has signed an investment contract for Korean Air to take over Asiana Airlines, which is experiencing serious business difficulties.

The Korean Development Bank announced on the 16th that it signed an investment contract worth 800 billion won with Hanjin Group, when it announced plans to integrate Korean Air and Asiana Airlines.

Asiana Airlines has been experiencing business deterioration since 2018 and, late last year, signed an acquisition agreement with HDC Hyundai Development Company. However, the acquisition was broken due to the aviation industry conditions deteriorating rapidly due to the new coronavirus infection crisis (Corona 19) in 2020.

Korea Development Bank is Asiana Airlines’ main creditor. Asiana Airlines has so far received more than 3 trillion won in support from the government.

Some criticize the merger plan that the government is trying to protect the management rights of Korean Air’s parent group, Hanjin Group, by spending taxes.

The Korean Development Bank plans to invest 800 billion won in Hanjin Group, which owns Korean Air, so that Korean Air can acquire Asiana Airlines.

If the Korean Development Bank invests 800 billion won in Hanjin Kal, Hanjin Group’s holding company, Hanjin Kal will participate in a KRW 2.5 billion paid-in capital increase from Korean Air. On this basis, Korean Air will invest 1.8 trillion won in Asiana Airlines to become the largest shareholder in Asiana Airlines.

The Korean Development Bank said: “Efforts to improve fundamental competitiveness, such as the restructuring of the aviation industry by intensifying competition in the global aviation industry and prolonged corona conditions” are required by the reason for the acquisition of Asiana Airlines by Korean Air.

In addition, the industry bank added that the consolidation of airlines in most countries is actively progressing, leading to a country and a national airline system. The Korean Development Bank said that when Korean Air and Asiana Airlines merge, the world’s seventh airline will be created.

Asiana Airlines has been experiencing business decline since 2018.

In April 2019, parent group Kumho Asiana Group decided to sell Asiana Airlines and then entered into an acquisition contract with HDC Hyundai Development Company in December of the same year.

However, as Asiana Airlines’ debt increased by more than 3 trillion won in 2020 and the aviation industry quickly froze due to the new coronavirus infection crisis (Corona 19), HDC Hyundai Development Company demanded a review of the origin of the acquisition conditions.

Ultimately, the contract was canceled because HDC Hyundai Development Company did not make the decision to take over until September, which was the final deadline.

The two companies are arguing in court, saying the other party is responsible for breaking the contract at the time with a deposit of 250 billion won.

Since then, the Korean government has provided an additional 2.4 trillion won to Asiana Airlines. Asiana Airlines is known to have exhausted most of the 3.3 trillion won loans that have been supported so far.

Private equity fund KCGI, which is fighting with Hanjin Group chairman Cho Won-tae for Hanjin Group’s management rights, criticized the merger plan, saying: “We squandered the national blood tax to save Cho Won-tae. “

KCGI said in a statement issued on the 16th that “President Won-tae Cho strongly opposes the attempt to defend the management rights of Hanjin Group and take over Asiana Airlines using only the people’s blood tax without the need for a private app of a won.

KCGI insisted that the paid-in capital increase from the general shareholder allocation method, not the third-party allocation, is “fair and reasonable.”

Under the proposed merger, the Korean Development Bank will take over Hanjin Kal’s shares through a tripartite capital increase.

Generally, a paid-in capital increase is made by first receiving an offer from existing shareholders and then receiving an offer to the general public for the shares (called shares with rights in rem) that have not been reached. However, in the case of a paid-in capital increase with a tripartite allocation, the company receives additional money and delivers newly issued shares to a third party other than the existing shareholders.

KCGI is concerned that if the Korean Development Bank secures Hanjin Kal’s actions in this way, it will act as a friendly party to President Won-tae Cho.

Currently, President Won-tae Cho’s family owns a 41.1% stake in Hanjin Kal. On the other hand, KCGI, Bando E&C and Cho Hyun-ah, former vice president of Korean Air, who are in conflict with President Cho, have 46.7% of the shareholders association. If the Korean Development Bank acts as a friendly party to President Cho, the KCGI alliance is likely to be kicked out of the Hanjin Group administrative dispute.

On the 15th, when reported in the media about the proposed merger, KCGI also stated that KCGI and other shareholder associations would participate in the capital increase instead of the “tripartite allocation that wastes public blood tax.”

For this reason, criticism has also been raised about whether it is a preferential treatment for chaebol due to the signing of an investment contract by the Korean Development Bank with President Cho, the current Hanjin Kal administration.

Industrial Bank Vice President Choi Choi said: “If management’s performance is insufficient, we are planning to replace or fire management. We will not unilaterally exercise favorable voting rights.”