The state-run Korea Development Bank said Thursday that it had signed a conditional memorandum of understanding on Hyundai Heavy Industries’ acquisition of Daewoo Shipbuilding & Marine Engineering.

While KDB is also to check the intention of Samsung Heavy Industries, the third of South Korea’s so-called “Big Three,” the latest deal was seen as putting industry frontrunner HHI in a highly favorable position to take over the cash-strapped DSME and secure market monopoly.

“KDB has signed today a conditional MOU concerning the merger and acquisition between HHI and DSME,” said KDB Chairman Lee Dong-gull in a press conference.

The due negotiations had to be kept nondisclosed, due to the complicated structure of the deal, Lee added.

The state-run bank, which is the largest shareholder of DSME, will also inquire with Samsung Heavy about its purchasing intention.

“HHI became the first (of the two shipbuilders) to clinch an MOU but this does not mean that it is to have any special benefits during the selection process,” Lee underlined, denying speculation that HHI was the only bidder.

DSME has remained under the state-run bank’s control since 1999, when the former Daewoo Group disintegrated in the aftermath of the Asian Financial Crisis. Though rumors sporadically spread about its new ownership, few have set out over recent years to take over the reeling shipbuilder amid a prolonged industry slowdown.

Upon logging massive operating losses and a liquidity shortage in 2015, the shipbuilder kicked off a turnaround plan to improve its financial structure and normalize management.

As a result, the company saw its debt ratio drop below 300 percent from above 5,000 percent as of the third quarter last year. Its operating profits stood at 700 billion won ($629 million) in 2017 and is estimated to come around 1 trillion won for 2018.

“Based on such improvements, we have judged that it is now the right time to find a new private owner for DSME,” the KDB chief said.

“KDB has so far carried out a series of restructuring actions as shareholder but the next step is to find a private shareholder that is well acquainted with the industry.”

KDB’s blueprint is to prevent the nation’s second-largest shipbuilder from being sold to a foreign entity and to reorganize the country’s shipbuilding industry into a “big two” frame.

“In order to fundamentally enhance the competitiveness of the industry, it is crucial to eliminate the inefficiency caused by overlapping investment under the current big three structure,” Lee said, limiting potential DSME bidders to Hyundai Heavy and Samsung Heavy.

DSME’s labor union immediately lashed back, claiming that a takeover by a local competitor will lead to massive layoffs.

But Lee dismissed such concerns saying, “There is little need for additional reduction of staff as DSME has already carried out extensive downsizing.”

Financial authorities also approved of the undergoing selloff for the long-distressed shipbuilder.

“The takeover, should it proceed as planned, will alleviate the oversupply and consequent depreciation in the shipbuilding industry,” said Choi Jong-ku, chairman of the Financial Services Commision.

Meanwhile, Hyundai Heavy’s labor union also expressed unease as the company has temporarily closed its Gunsan shipyard in Northern Jeolla Province amid the prolonged industry slump.

Unionists, as well as the Gunsan local government and communities, argue that the acquisition of DSME -- which has a yard in Geoje, South Gyeongsang Province -- may drive the company to totally abandon the suspended Gunsan business.

By Bae Hyun-jung (tellme@heraldcorp.com)