Dive Brief:
- Korea Lines' parent company, the Samra Midas Group (SM Group), will operate Hanjin's former route from the Far East to the U.S., American Shipper reported Tuesday.
- Korea Lines' board members did not approve the purchase of the bankrupt Hanjin's Pacific route, citing a lack of experience in the container shipping business. Also, concern over a potential cash shortfall caused by the struggling shipping industry was also cited by the board.
- A separate new entity created by SM Group, to be called the SM Line, will take over the routes between the Far East and the U.S.
Dive Insight:
On January 2, 2017, Hanjin revealed a 25% price cut for its Pacific to U.S. route, already pledged to Korea Line. The drop in cost brought the route down from $31 million to $23 million, a considerable discount for a company hunting for cash to pay off its creditors. The board of Korea Lines still initially rejected the sale, which underscores the fact that purchasing liquidated assets of a failed shipping company is far more complex and risky than initially speculated amidst the uncertainty of the future of the shipping industry.
While the Hanjin assets are approaching basement bargain prices, it is worrisome that Korea Lines' board raised valid objections to turning down the acquisition, but will likely either be overruled based on corporate bylaws, or sidestepped through the creation of SM Group's proposed subsidiary LM Lines. Shifting the business from one established company to another brand new one may help for governance and tax purposes, but it doesn't shift the risk inherent in trying to expand in an uncertain business environment.
Then again, if SM Group has a plan in place to return this trade route to profitability even in a cash-strapped economy, buying low and growing into a consolidated and more lean industry may signal financial health overall for an industry with global obligations.
