European Commission bans proposed acquisition of Daewoo Shipbuilding & Marine Engineering by Hyundai
The European Commission has prohibited under the EU Merger Regulation the acquisition of Daewoo Shipbuilding & Marine Engineering CO., Ltd (DSME) by Hyundai Heavy Industries Holdings (HHIH).
The merger between the two South Korean shipbuilders would have created a dominant position for the newly merged company and reduced competition in the global market for the construction of large liquefied gas carriers (“LNG”) (“LLNGC”). The parties have not formally proposed solutions to address the Commission’s concerns.
Executive Vice President Margrethe Vestager, in charge of competition policy, said: “Large LNG carriers are an essential part of the liquefied natural gas (LNG) supply chain and enable the transportation of this energy source around the world. LNG contributes to the diversification of Europe’s energy source and thus improves energy security. The merger between HHIH and DSME would have led to a dominant position in the global market for the construction of large LNG carriers, for which there is significant demand from European carriers. Since no remedies were offered, the merger would have led to a decrease in the number of suppliers and an increase in prices for large vessels carrying LNG. That’s why we banned merging.
Today’s decision follows a thorough investigation by the Commission of the proposed transaction, which would have brought together DSME and HHIH, two world-leading shipbuilders. Both companies are world leaders in the construction of large LNG carriers and two of the three largest players in this highly concentrated market.
Large LNG carriers are an essential part of the LNG supply chain. They are very sophisticated vessels that can transport large quantities of LNG (145,000 m3 and more) at a temperature of minus 162 degrees Celsius. Over the past five years, the global market for the construction of large LNG carriers has represented up to €40 billion, with European customers accounting for almost 50% of all orders.
During the investigation, the Commission received comments from a large number of customers, competitors and other third parties. These companies feared that the transaction would create a dominant position in the world market for the construction of large LNG carriers, reduce competition and increase the prices of these vessels.
The Commission’s decision
Whereas, when the in-depth investigation was opened, the Commission was concerned about the markets for the construction of oil tankers, liquefied petroleum gas (“LPG”) carriers, container ships and LNG carriers (large and small), today’s decision only concerns the market for large LNG carriers.
The Commission found that the transaction, as notified, would have resulted in (i) the creation of a dominant position by the merged company on the market for the construction of large LNG carriers, (ii) a reduced choice of suppliers and (iii ) higher prices for EU customers and ultimately for energy consumers.
The Commission’s decision is based on the following considerations:
- The parties have very large and growing market shares. The combined market shares of the parties are very large. The combined entity would have been by far the largest player in the world, in an already concentrated market. The combined market shares of the parties would be at least 60%, which is in itself an indicator of a dominant position on the market. Additionally, the combined market shares of DSME and HHIH have grown over the past 10 years.
- Very few alternatives for customers. Apart from the parts, there is only one other major competitor in the market. However, this competitor’s capacity would not have been sufficient to act as a credible constraint on the new merged company. A fourth independent shipbuilder has limited activities in the large LNG carrier market and focuses on domestic projects. The remaining shipbuilders would not be able to limit price increases, as shown by the fact that they have not contracted any large LNG carriers in recent years.
- Limited capacity in the market. The Commission has carried out a detailed analysis of supply and demand, which shows that the combined entity would have occupied a central position in the market, since the capacity of the remaining competitors would not have covered the projected demand on the market.
- Very high barriers to entry and no purchasing power. Large LNG carriers are very sophisticated and differentiated vessels, extremely complex to build. Entering the market and operating successfully in it is very difficult. Several exits have been observed in recent years and no significant new entries are expected. In addition, the customer base of large LNG carriers is generally fragmented, with generally small orders. Customers have a very limited choice of shipbuilders as possible suppliers.
- No impact from the coronavirus pandemic. The Commission assessed the impact of the coronavirus pandemic on the market and found that demand for large LNG carriers was not affected by the pandemic. In addition, the outlook for future demand is very positive.
The parties have not formally proposed solutions to address the Commission’s concerns. Therefore, the Commission has prohibited the proposed transaction.
HHIH is a privately held South Korean company which is mainly active in shipbuilding. It produces a range of commercial vessels, marine engines and offshore installations used to explore, produce and process oil and gas under the sea, including LNG carriers of all sizes.
DSME is a South Korean company which is also mainly active in shipbuilding. It produces a range of commercial vessels and offshore installations, including large LNG carriers. Its majority shareholder – and seller in the proposed transaction – is Korea Development Bank (“KDB”).
Merger control rules and procedure
The transaction was notified to the Commission on 12 November 2019 and the Commission opened a thorough investigation on December 17, 2019. Since then, the procedural deadline has been suspended three times due to HHIH’s failure to provide the Commission with the requested information in a timely manner.
The Commission is responsible for assessing mergers and acquisitions involving companies whose turnover exceeds certain thresholds (see Article 1 of the Merger Regulation) and to prevent concentrations which would significantly impede effective competition in the EEA or a substantial part of it.
The vast majority of notified mergers do not pose competition concerns and are cleared after routine review. From the moment an operation is notified, the Commission generally has 25 working days to decide whether to grant its approval (phase I) or to open an in-depth investigation (phase II).
Over the past ten years, the Commission has approved over 3,000 mergers. Today’s ban is only the tenth merger blocked by the Commission during the same period.
Six phase II merger investigations are currently underway: the planned acquisition of Recticel by Greinerthe planned acquisition of Arm by NVIDIAthe planned acquisition of Kustomer by Meta (formerly Facebook), the proposed acquisition of Grail by Illuminathe proposed merger between Cargotec and Konecranesand the proposed acquisition of Trimo by Kingspan Group.
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