Hanwha separates cluster munition business
Hanwha Corp., the de-facto holding company of Hanwha Group, said it will spin off its cluster munitions business and set up a new company, tentatively called Korea Defense Industry, which will develop and manufacture products including explosives and munitions.
In announcing this, Hanwha Corp. cited its efforts to comply with environmental, societal and governance (ESG) standards.
The company’s cluster munitions business has been criticized by activists across the world as inhumane.
In 2007, the Norwegian Government Pension Fund dropped Hanwha from its list of companies to invest in due to this.
Since developing these tools of death and destruction affects the reputation of the entire Hanwha Group, the spin-off is interpreted as an effort to hedge potential risks across the group in terms of drawing investments from overseas funds.
However, the separation of the business would narrow Hanwha Corp.’s business portfolio, which would not be helpful in terms of improving profits.
Hanwha Corp. does not disclose its cluster munitions business sales alone, but it is said to account for less than 2 percent of the company’s total sales.
Hanwha said the separation has “no relation” with the possible succession of heir Kim Dongkwan to ownership of the company.
Since Kim’s stake with voting rights in Hanwha Corp. remains at 4.44 percent, far below his father, group Chairman Kim Seung-youn, with 22.65 percent, spinning off Hanwha Corp.’s multiple businesses will save costs for the younger Kim in taking control of the holding firm.
The company’s recent move to spin off its cluster munitions business is in line with this approach, industry officials said.
Hanwha Corp. is comprised of four divisions — defense, explosives, trade and machinery.
The chances are slim for Hanwha Corp. to use the spin-off as a tool for the ownership succession, given the country’s Fair Trade Commission (FTC) has already been investigating Hanwha Group for potential unfair practices to strengthen the younger Kim’s grip on the group.
“The benefits coming from the spin-off are too small for the company to take on negative public perceptions of the ownership succession,” an industry source said.
A Hanwha Corp. official said the spin-off of the cluster munitions business has “no relation” to the ownership succession, and it decided to do so to “promote Hanwha Corp. shareholders’ value.”
“With a growing number of investors placing more importance on corporate ESG compliance, we believe the spin-off will have a positive impact on the share price in the future,” the official said.
“The spin-off has no relation with ownership succession, and the succession issue is a matter for the future.”
Earlier thoughts are that since inheriting shares worth more than 3 billion won is subject to at least a 50 percent tax, handing over Chairman Kim’s stake in the company to his son is not a priority for the group.
Due to this, industry officials said one of the most realistic scenarios is the merger between Hanwha Corp. and H Solution, a software firm controlled by the younger Kim.
Kim has a 50 percent stake in H Solution, followed by his two younger brothers each having 25 percent stakes.
Since H Solution already has a 4.2 percent stake in Hanwha Corp., the merger and following stake exchange between the two companies can raise Kim’s stake in Hanwha Corp.