Korean Air Lines Co. Ltd. has tentatively agreed to sell its in-flight duty free and meal service units to the country’s second-largest private equity firm Hahn & Company, with the carve-out expected to secure almost 1 trillion won ($840 million) for the cash-strapped flagship carrier, according to industry sources on July 6.
The two companies are in final discussions on the terms and conditions of the deal which Korean Air plans to report to the board meeting on July 7. The deal value may vary depending on how the meal service is priced.
Additionally, Hahn & Company is considering buying the aviation training center of Korean Air located in Yeongjong Island for an undisclosed sum, which is expected to help solve its liquidity problems caused by the global pandemic.
Unlike other potential bidders deterred by coronavirus, Hahn & Company saw the deal as an opportunity to purchase an attractive asset for a reasonable price. The firm determined that Covid19 would not weigh down the airline industry for too long and decided to purchase the airline’s in-flight duty free and meal service units together because their overlapping distribution structure would help to create synergy.
The domestic airline has employed self-rescue measures to sustain its operations such as suspending flights, placing over 70 percent of its employees on both paid and unpaid leave as well as reviewing potential assets for sale. Since April, the company’s business units including Maintenance and Repair Organization (MRO), mileage program, among others have been considered for sale.
The company’s in-flight meal service is the first in line to be sold because it would be relatively easier to carve out and take less time to review compared to other potential assets. In addition, there had been a similar case from industry peer Asiana Airlines in 2003 when the airline entered an 8:2 joint venture with Germany’s Lufthansa Group-owned catering service LSG Sky Chefs. The 15-year partnership ended in 2018, and Asiana Airlines proceeded to set up a 6:4 joint venture with China’s HNA Group to launch in-flight meal service named Gate Gourmet Korea.
Both domestic and foreign investors reached out to Korean Air, with great interest coming from cash-equipped private equity firms. However, uncertainties stemming from the pandemic slowed down the process with majority of potential bidders dropping out because the valuations of target assets could not be conducted properly.
KOREAN AIR SET TO SECURE ALMOST $4 BILLION IN TOTAL
On July 2, the flagship carrier received a commitment of 1 trillion won in government aid, added to the promised 1.2 trillion won bailout package from state-lenders Korea Development Bank and the Export-Import Bank of Korea in April.
In addition to the 2.2 trillion won in financial aid, Korean Air plans to raise an additional 1.15 trillion won by issuing new shares, with its holding company Hanjin KAL participating via offering bonds with warrants.
The prospective PE deal of around 1 trillion won joined with the 2.2 trillion won government aid and 1.15 trillion won paid-in capital increase will fetch over 4 trillion won for Korean Air.
Korean Air is still open to selling additional assets including its maintenance and repair organization and mileage program among others, depending on its financial conditions and coronavirus. But a creditor source said that the MRO would take a long time to sell because it needs to be spun off for a possible sale. The mileage program seems hard to sell given that its business is dependent on Korean Air.
This is not the first time Hahn & Company has stepped in to buy a distressed company. In 2014, the PE, with $6 billion of assets under management, acquired a non-container shipping unit from the bankrupt Hanjin Shipping and the bulk cargo business from the distraught Hyundai Merchant Marine in 2016, now known as H-Line Shipping, the largest long-term dry bulk and LNG carrier in Korea.
By Sang-eun Lucia Lee
<Edited by Danbee Lee>