Austal press release
Austal Limitedrefers to media on 1 April 2024 and confirms it has received an unsolicited, conditional and non-binding indicative proposal from Hanwha Ocean Co., Ltd. to acquire Austal by way of a scheme of arrangement. Under the Indicative Proposal, Austal shareholders would receive $2.825 AUD cash per Austal share.
Hanwha’s Indicative Proposal is subject to numerous conditions, including due diligence, various regulatory approvals including Australia’s Foreign Investment Review Board (FIRB), the Committee on Foreign Investment in the United States (CFIUS) and the US Defense Counterintelligence and Security Agency, final approval of the Hanwha Board, the unanimous recommendation of the Austal Board and Austal shareholder approval.
Austal invests considerable time and resources into deciding whether it should grant a potential purchaser access to the Company’s otherwise confidential detailed financial records, forecasts and contracts as part of a due diligence process.
In doing so, it assesses a range of factors, including but not limited to the potential for shareholder value creation, competition concerns and a potential purchaser’s ability to ultimately complete a transaction (which would include necessary government approvals). This latter consideration is particularly relevant in relation to the proposal from Hanwha, given Austal’s position as the designer and builder of defence vessels for the Australian and US navies and ownership clauses associated with defence contracts.
Austal also notes the announcement by the Australian Government on 23 November 2023 that Austal and the Department of Defence had executed a Memorandum of Understanding (MoU) to negotiate a Strategic Shipbuilding Agreement (SSA), under which Austal would be appointed as the Commonwealth’s strategic partner for vessels to be constructed in Western Australia.
In announcing the MoU for the SSA, the Commonwealth Department of Defence noted that “a sovereign and enduring naval shipbuilding and sustainment industry at Henderson is central to the Government’s commitment to ensuring continuous naval shipbuilding in Australia and delivering the capabilities needed to keep Australians safe.”
The Austal Board, together with its advisers, has considered the Indicative Proposal in detail and engaged with Hanwha in relation to whether the transaction described in the Indicative Proposal would obtain the relevant regulatory approvals in Australia and the USA to enable it to proceed. At present Austal is not satisfied that these mandatory approvals would be secured, however the company is open to further engagement if Hanwha is able to provide certainty on whether a transaction would be approved.
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Hanwha Group press release
Hanwha Group (Hanwha) has submitted an indicative offer to the Australian headquartered Austal board to acquire the global business of Austal, via a scheme of arrangement, subject to satisfactory due diligence.
Hanwha brings important capabilities and investment to support Austal’s business and local Australian communities while aligning with government objectives in Australia, the US and South Korea.
A recent media report which states concerns that the Australian government would not grant permission of the sale of Austal because it carries out defence contracting work for the Australian government is baseless.
“There is no foundation of the claim that the Foreign Investment Review Board (FIRB) would
reject Hanwha’s acquisition of the company,” David Kim, Executive Vice President at Hanwha said. Hanwha is respectful of the FIRB regulatory approval process, but is confident in its ability to obtain FIRB approval for the transaction.
“Hanwha has already obtained FIRB approval for prior investments in Australia and has a proven track record of investment in Australia’s defence industrial base, being the contracted supplier of infantry fighting vehicles, self-propelled howitzers and ammunition resupply vehicles with significant investment in a Geelong manufacturing facility that employs local workers,” he said.
Hanwha is a credible buyer with a highly competitive offer. The company’s rationale for the interest in Austal includes:
- Strengthening alliances: Hanwha is a known entity and respected ally to both Australia and US defence leaders with a strategic presence in the Indo-Pacific. 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.
- Supporting government priorities: The deal is aligned with Australian government objectives outlined in the Independent Analysis of Navy’s Surface Combatant Fleet, where Hanwha’s capabilities and investment would accelerate delivery of critical programs and allow Australia to keep sovereign shipbuilding capabilities in Henderson, WA.
- Austal value: Hanwha has more than 50 years of experience in shipbuilding, which would expand Austal’s growth potential and accelerate innovation (e.g. steel shipbuilding, production automation, Smart Shipyards, autonomous technology) while unlocking Austal value with increased investment and efficiencies.
- Long-term partner: Hanwha is a long-term partner with the intent to invest in the business along with the workforce and communities it supports, while bringing stability to the company with long-term partnership at the forefront of decision making. With a focus on local jobs, community partnerships and economic development, Hanwha is an ideal partner for stable long-term growth compared to other ownership models.
Hanwha believes an Austal acquisition would benefit numerous stakeholders, including governments, shareholders, employees, and communities and is planning to go through all the proper processes towards a successful sale.
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Naval News Comments:
Headquartered in Western Australia, Austal has received significant support from the Australian government over the years to ensure it’s survival as the country’s sole fully sovereign naval shipbuilder. While it’s made it’s name building patrol boats for Australia and it’s Pacific island neighbors, in October last year Austal signed a pilot agreement with the Australian Department of Defence through which it was designated the sovereign “strategic partner” for vessel construction in WA.
This came alongside the announcement that Austal will build the Australian Army’s future medium and heavy landing craft, as well as additional Cape Class patrol boats.
The company also has shipyards in the Philippines and Viet Nam, which despite generally catering to the commercial market, have made various forays into the Defence and security space. Most recently, Naval News understands, the company has been eying the possibility of selling Guardian class patrol boats to the Philippines Coast Guard.
To purchase Austal, Hanwha would require the approval of the Foreign Investment Review Board (FIRB), the Treasurer, and likely the Australian Department of Defence.
Austal USA is a Prize and a Challenge
While Hanwha is no-doubt interested in Austal’s Australian and Southeast Asian operations, it’s U.S subsidiary Austal USA is perhaps both the bigger prize and larger regulatory challenge.
Naval News understands that Austal USA is seen particularly valuable for Hanwha due to it’s backlog of orders and established relationship with the U.S. Department of Defense (DOD). While the flagship aluminum-hulled Littoral Combat Ship (LCS) and Expeditionary Fast Transport (EPF) programs are coming to their end, the shipyard has successfully diversified into steel shipbuilding through contracts with the U.S Navy and Coast Guard.
Austal USA has also positioned itself as a possible second shipyard for the Navy’s Constellation class frigates, a program potentially worth billions, through which Hanwha could grow it’s American business.In essence, the acquisition of Austal USA is seen as backdoor into the challenging U.S market from which Hanwha could expand it’s operations.
Doing so in practice, however, would likely be a challenge. Like most foreign-owned Defence companies operating in the U.S. there is a degree of separation between the U.S subsidiary and parent company. In Austal USA’s case, that takes the form of Special Security Agreement (SSA) signed in 2008 between Austal, Austal USA and the DoD which ensures that, while Austal USA remains a wholly-owned subsidiary of Austal it operates relatively autonomously from the parent company.
This is exemplified by the fact that, in-spite of the group CEO sitting on Austal USA’s board, the President of the Board who is an American citizen reports to the board instead of the CEO. Austal is also limited in it’s ability to influence the execution of sensitive or classified contracts by Austal USA and has limited access to sensitive U.S Government data.
In practice, according to multiple sources who have spoken to Naval News in the past, Austal has almost “no-say” in the day-to-day operations of Austal USA.
In order for a follow-up Hanwha offer to go through, it would require the approval of Committee on Foreign Investment in the United States (CFIUS) and the U.S Defense Counterintelligence and Security Agency. It would also likely lead to a review of the existing SSA, especially given the differing levels of defence industrial integration and cooperation between the United States and Korea compared to the United States and Australia.
Given Korean shipbuilding’s global success, compared to Australia’s lackluster performance on the export market, the U.S may also have very different feelings about allowing a competitor to establish itself in the U.S compared to Australia.
