It’s Hanwha against the hawks in race for shipbuilder Austalby...

It’s Hanwha against the hawks in race for shipbuilder Austal
by Kylar Loussikian, copyright link
April 5, 2024 12:01 AM
Defence Minister Richard Marles last year made it clear he would want Austal to play a part in the nuclear-powered submarine development. It is currently building part of the US Virginia class submarine and would be a likely contender in building part of a newly designed submarine developed under the pact.Photo by: GettyThen there is the Defence Strategic Review, which called for a greater focus on maritime and amphibious missions, and which is likely to push military spending well over 2 per cent of GDP.And in November, Marles and Defence Industry Minister Pat Conroy went even further to support Austal. The company, they said, would become the federal government’s monopoly shipbuilder in Western Australia, guaranteeing it a pipeline of navy contracts for smaller warships as part of the rationalisation of shipyards in Henderson, a suburb in Perth’s south.Hanwha is already hereHanwha is confident its bid can pass scrutiny and that it would be an acceptable owner of Austal, which owns four shipyards including a major precinct in Mobile, Alabama.For a start, Hanwha is already doing plenty of work for the Australian Defence Force. In December, it signed a $2.4 billion deal to deliver 129 infantry fighting vehicles from 2027.Hanwha operates a manufacturing facility in Avalon, Victoria, the construction of which was part of a $1 billion contract awarded to the company for the production of Huntsman vehicles in 2021.Hanwha acquired control of Daewoo Shipbuilding and Marine Engineering. It is also banking on serious public support from defence officials.Visiting Seoul in February, US Navy secretary Carlos Del Toro said he had urged executives at major shipbuilders including Hanwha to “invest in America”. “I was enormously gratified by the strong interest expressed by the leaders of each of these world-class shipbuilders in establishing US subsidiaries and investing in shipyards in the US,” Del Toro said of his visit to South Korea.Similarly, Marles has backed closer ties with South Korea.“There are few more important priorities for Australia than deepening our strategic partnership with ... Korea,” he said last year. “As mature liberal democracies, I’m convinced the strategic defence relationship between Australia and South Korea can go from strength-to-strength and is full of opportunities.”More than one suitorHanwha is not the only international group interested in Austal. Despite its contract wins, the company has been through a turbulent period. Last year, US regulators accused one senior executive of manipulating financial information to create the impression the shipbuilder was meeting its targets – when it was not. The Securities and Exchange Commission also accused others at the company’s US business of being involved in the alleged accounting fraud, which ran from 2013 to 2016.These issues, and a history of poor financial performance, have meant Austal has long traded at a discount to US-listed shipbuilders including Huntington Ingalls, General Dynamics and Lockheed Martin. It was only with the disclosure that it had appointed JPMorgan and Poynton Stavrianou to deal with interest from suitors, first revealed by The Australian Financial Review’s Street Talk column in June, that the share price took off.Austal last traded at $2.26, a third higher than this time last year. Its shares have risen more than 28 per cent in six months, but drifted at below $2 for much of 2021 and 2022.Hanwha’s bid of $2.825, in that context, was generous. It had taken advice from UBS early in its work on Austal, although Goldman Sachs is also close to being engaged as the South Korean group contemplates an extended campaign to acquire its target.Sources suggested that the next highest proposal was from Cerberus Capital Management, a $US60 billion ($88 billion) alternative asset investor run by billionaire investor Steve Feinberg, and came in about $2.40 per share. Cerberus has become increasingly interested in defence assets, spending $US300 million in 2022 buying the Subic Bay shipyard in the Philippines, a former military base close to the South China Sea.There have been other suitors. New York’s JF Lehman & Company, which specialises in investing in complex and regulated sectors, had tapped Morgan Stanley for help with due diligence and funding last year.JF Lehman has some $US4 billion in assets under management and is focused on aerospace, defence and maritime sectors. It was part of a consortium alongside Apollo Global Management and Hill City Capital that acquired Atlas Air Worldwide, one of the largest providers of outsourced aircraft and aviation operating services, in a deal worth about $3 billion.Another one-time suitor was Arlington Capital Partners. It has some $US7 billion in assets under management and had been working up a $US3.5 billion fund to invest in government services, aerospace, defence and healthcare. Among its investors are the California Public Employees’ Retirement System, Teachers’ Retirement System of Illinois, the Arkansas Teachers Retirement System and the New Mexico State Investment Council.Then there’s Bondi Partners, the advisory shop founded by former treasurer Joe Hockey which is hanging around the hoop. While it largely remains an advisory house – having assisted everyone from Blackstone in its pursuit of Crown Resorts to infant formula group Bubs Australia break into the lucrative US market – Bondi Partners is increasingly making its way into capital markets. In 2021, Bondi Partners and Ellerston Capital established the 1941 fund, spruiked as a way to invest in national security.Retail defence fund Hockey has made his views about what should happen to Austal clear. “Just as we went with a begging bowl to offshore pharmaceutical companies during COVID and were thrown to the end of the queue, so too will we be thrown to the back of the queue when it comes to military industrial capacity in the event of conflict unless we build our own capacity,” he said in an interview with the Financial Review last year.“I want to set up a retail defence fund, almost like a war bond, where mums and dads get the opportunities to invest in assets that will help to protect them and their children,” he said on another occasion late last year. “I get this enormous pain in my gut when I think we’re just going to have this massive wealth transfer from Australian taxpayers to the US, or Britain or any others simply because we don’t have our own.”That puts him on the other side of the wall to Christopher Pyne, his one-time cabinet colleague and a former defence minister who has since started an advisory of his own, Pyne & Partners.Hanwha is adamant it is a “credible buyer” that has long-term ambitions in Australia. In a lengthy statement defending itself from suggestions it would not be approved as a buyer for Austal, the company said it had already obtained FIRB approvals and had “a proven track record of investment in Australia’s defence industrial base”.“Hanwha is a known entity and respected ally to both Australia and US defence leaders with a strategic presence in the Indo-Pacific,” it said. “Hanwha’s acquisition of Austal would build upon the countries’ alliances and support Australia’s national security as a partner and ally, building upon a series of relationships between key defence and security partners.”And, as its supporters point out, all it wants is an opportunity to conduct due diligence, and if it chooses to proceed, put its credentials to the government. What could be the harm in that?