Korean bid for Australian shipbuilder hampered by security concerns

Australia’s only listed defense company is at the center of a dispute that is likely to shape Washington and Canberra’s ability to respond to China’s maritime military build-up.

Perth-based Austal is resisting takeover efforts by South Korea’s Hanwha Ocean, one of the world’s largest shipbuilders, which says its ownership would boost Australia’s shipbuilding prowess as China increases its naval power.

Austal’s board rejected a bid last year on valuation grounds, and in March said a second bid, for $1 billion, had no realistic prospect of approval by Canberra or Washington due to “associated ownership clauses.” with defense contracts” in Australia and the United States, where Austal also has two shipyards and carries out work for the US Navy.

Austal’s Henderson shipyard near Perth, on the shores of the Indian Ocean, is seen as vital to Australia’s plans to double the size of its naval fleet with an additional investment of A$11.1 billion ($7.2 billion).

But the Korean conglomerate was encouraged when Australian Defense Minister Richard Marles said after a meeting with his South Korean counterpart in Canberra earlier this month that “from the (Australian) government’s perspective, we have no concern that Hanwha is moving in this direction.” .

Lee Yong-ook, head of Hanwha Ocean’s shipbuilding business, told the Financial Times that an acquisition would boost Australia’s ability to produce ships capable of taking on the Chinese navy.

Hanwha manufactures a range of maritime vessels, from destroyers and frigates to oil tankers, container ships and submarines. © Ju-min Park/Reuters

“Austal specializes in building aluminum ships, which is good when building passenger ferries, but does little to counter Chinese battleships,” Lee told the Financial Times.

“Our efficiency is greater (than Austal’s) and our ships are all steel,” he added. “We will meet (Canberra’s) sovereignty requirements and transfer ship design knowledge and production capacity to Australia.”

Lee said Hanwha had discussed its offer with senior Australian and Western Australian officials, shipbuilding industry representatives and politicians from Australia’s ruling and opposition parties, as well as “senior representatives of the US government”.

“The clear message we received was that, based on the South Korea-Australia alliance and Hanwha’s experience and track record, there would be no adverse implications for either Australia or the United States if Hanwha were to acquire Austal,” Lee said.

Lee also said Hanwha’s superior resources and capabilities would help the United States increase its shipbuilding capacity, as Washington seeks to close the gap with China, which has more than 20 shipyards compared to seven in the United States.

He added that Hanwha could offer the US Navy enhanced “maintenance, repair and operation” capabilities at its local shipyard in South Korea and potentially at Austal shipyards in the Philippines and Australia, which would help the Navy of the US in the event of a conflict in the South China Sea or the East China Sea.

Austal had an order book worth A$11.6 billion ($7.6 billion) last year, but its market capitalization is less than A$1 billion and it is struggling with governance issues after three executives at its US division were accused of accounting fraud by the US Securities and Exchange Commission. Exchange Commission in 2023.

Australia this month unveiled plans to tighten foreign ownership rules in specific sectors, including defence. But Anthony Kavanagh, co-founder of Chester Asset Management, a major Austal shareholder, said Marles’ statement had opened the door to a third approach.

Cerberus, a US private equity firm that specializes in distressed assets, is among the shipbuilder’s rival suitors.

“We could be at the beginning of a bidding war,” Kavanagh said, arguing that Austal should engage with its potential bidder but that a higher price than the latest cash offer of A$2.82 per share would be justified, given the company order book. “We’re optimistic about getting close to $4 a share,” he said.

Austal’s largest shareholder is Tattarang, the family office of billionaire Andrew Forrest, which has a nearly 20 per cent stake in the business and was linked with a potential takeover when it built the holding company in 2022.

According to a person with knowledge of the situation, Tattarang believes Hanwha’s offer significantly undervalues ​​the shipbuilder. Tattarang declined to comment.

A Sydney-based banker said Hanwha, advised by a lobbying firm set up by former Australian defense minister Christopher Pyne, had “gained credibility” in Canberra with a series of contracts as part of Korea’s global defense export push. from the south.

Hanwha’s land defense division signed deals last year with the Australian government to build Redback infantry fighting vehicles and Huntsman self-propelled howitzers in the country.

But Ian Christie, an analyst at stockbroker Argonaut, said Hanwha still faced “a long road” of regulatory barriers, including from Australia’s Foreign Investment Review Board, overseen by the Treasury Department.

Australia’s Defense Department said Treasury would assess the impact of any proposed acquisition. “Proposals are evaluated by the Foreign Investment Review Board on a case-by-case basis and this would be no different,” he said.

Jennifer Parker, an associate at the Australian National University’s School of National Security and a former naval officer, said the sale of Austal to Hanwha needed to be considered through the lens of Australia’s plans to boost the sovereign shipbuilding capability of the country.

“There is no reason why Australia can’t become a shipbuilding power and a relationship with Hanwha could help with that,” he said, adding there was a risk the Korean company could buy Austal and focus primarily on its assets. Americans. “The key question we need to ask ourselves is what is Hanwha’s intention?” she said.

Additional reporting by Demetri Sebastopulo in Washington and Antoine Gara in New York

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