Up in the air: Korean Air/Asiana tie-up still awaiting outcome of regulatory reviews

Data InsightDealspeak 20 September

Up in the air: Korean Air/Asiana tie-up still awaiting outcome of regulatory reviews

Doubts remain over whether a proposed acquisition of Asiana Airlines [KRX:020560] by Korean Air Lines [KRX:003490] will take off this year following an unprecedented, protracted approvals process that continues to wait on word from the European Commission (EC) and the US.

The deal, which is set to create the world’s seventh-largest global airline operator and provide a KRW 1.5trn (USD 1.34bn) capital injection to cash-strapped Asiana, has been delayed 34 months since it was first announced in November 2020. Indeed, it looks set to drag on beyond its end-September 2023 deadline, with the EC reportedly only finalizing its extended review the following month.

According to Mergermarket data, out of 149 airline deals in Asia-Pacific since 2010, the Asiana approach is the largest, and while delays are an unavoidable part of M&A across the industry, this case has hit new heights.

Previously, the world’s longest-running airline takeover saga was a USD 6.77bn merger between Brazil’s TAM SA and Chiles’ LAN Airlines in 2010 to create the largest player in Latin America, per Mergermarket. The transaction involved multiple antitrust authorities and 22 months elapsed before it got the green light.

More recently, deals by China’s Tianjin Airlines for Hainan Airlines (2015; USD 908m) and ANA Holding’s consolidation of budget carrier Peach Aviation (2018; undisclosed sum) rolled on for 21 and 19 months, respectively, before they closed.

Fight or flight?

The planned merger between Korea’s two full-service carriers has been given the go-ahead in 11 jurisdictions, but is still awaiting approval from the EC, the US, and Japan.

Antitrust issues are not usually a deal-breaker in airline M&A, given companies actively respond and negotiate with regulators when looking to push through takeovers, says one sector executive. If this strategy fails, firms tend to withdraw filings if they feel regulatory reviews are likely to rumble on.

The biggest sector deal - between AMR Corporation/US Airways Group to create the world’s largest player (USD 11.83bn; 2013) - initially faced a US Department of Justice lawsuit, but still closed within nine months after antitrust concerns were settled by rendering takeoff and landing slots at major domestic airports.

By comparison, Air Canada/Transat A.T. (USD 380m; 2019) withdrew filings some 22 months after their merger was announced following prolonged discussions with the EC.

While the Korean Air/Asiana takeover is likely to incur some regulatory intervention, it is hard to predict the outcome now, opines a source familiar with the situation.

Aside from the EC’s initial concerns about cargo transport services for “all of Europe and Korea”, what the US will finally say remains a risk, adds a sector lawyer.

He cites the US’ increased attention on the industry and its aggressive stance this year against JetBlue’s USD 3.8bn swoop for Spirit Airlines.

Turbulent times

In the event the Asiana deal is waved through, the integration of its three low-cost carriers (LCCs) - Jin Air, Air Busan, and Air Seoul - is likely to follow, but this could impact competition structure in the country and encourage deals by the other six LCC players (Jeju Air, T’way Air, Eastar Jet, Aero K Airlines, Air Premia and Fly Gangwon) to pursue M&A or seek capital raises. However, consolidation among them is unlikely given a lack of synergies, says the sector executive.

Should the deal fail, Asiana is expected to look for a new buyer, particularly after the coronavirus (COVID-19) pandemic cast a shadow over the business’ continuity.

Creditors have so far provided KRW 3.6trn (USD 2.7bn) to the airline to prevent it going under. A third-party placement is needed to pare back debt and shore up the balance sheet. Despite an improved outlook following the re‑opening of borders, Asiana’s massive debt pile, and operating in an industry at the mercy of economic cycles and macro headwinds, are likely to remain hurdles to attracting strategic bidders, explains the first executive.

Moreover, investment is also required to replace the company’s outdated fleet, while a new owner could consider layoffs as it seeks to restructure, explains the executive. Asiana employs around 8,344 staff, nearly half of Korean Air’s personnel, but the average wage is around 12% higher than its bigger rival, according to company disclosures.

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