Eastar on Brink of Bankruptcy on Deal Collapse | Be Korea-savvy

Eastar on Brink of Bankruptcy on Deal Collapse


This photo taken July 14, 2020, shows Eastar Jet's headquarters in western Seoul. (Yonhap)

This photo taken July 14, 2020, shows Eastar Jet’s headquarters in western Seoul. (Yonhap)

SEOUL, July 23 (Korea Bizwire)Debt-ridden Eastar Jet Co. may face bankruptcy after Jeju Air Co. scrapped its plan to acquire the smaller budget carrier amid the new coronavirus’ impact on the airline industry, sources said Thursday.

Jeju Air, South Korea’s biggest low-cost carrier, said earlier in the day that it has decided to nix the takeover deal due mainly to rising COVID-19 pandemic-related uncertainties.

“It’s regrettable that we have decided to scrap the deal despite the government’s intention to support the deal. But the decision was inevitable due to uncertainties amid the pandemic and the possible impact on shareholders’ value,” Jeju Air said in a statement.

In response to Jeju’s announcement, Eastar said Jeju Air violated terms of the deal.

“We urge Jeju Air to proceed with the deal, and we will seek every possible measure to make Jeju take responsibility for the deal’s collapse,” Eastar Senior Vice President Kim You-sang told Yonhap News Agency over the phone.

The Ministry of Land, Infrastructure and Transport demanded Eastar come up with a Plan B and said it will make efforts to avoid massive job losses. The carrier has some 1,500 employees.

“It appears to be very uncertain for Eastar to normalize its operations at the moment. The government will extend a helping hand to Eastar if the company presents a Plan B,” Kim Sang-do, director general for aviation policy at the ministry, said in a briefing.

Analysts said Eastar will inevitably go broke if there are not viable investors to take over the debt-ridden carrier.

“Eastar’s capital erosion and snowballed debts appear to be a stumbling block,” Shinyoung Securities Co. analyst Um Kyung-a said.

On Thursday, Jeju Air ended 1.2 percent higher at 16,450 won, outperforming the broader KOSPI’s 0.6 percent loss.

The deal’s rupture comes four months after Jeju Air signed a deal in March to acquire a controlling 51.17 percent stake in Eastar Jet from Eastar Holdings for 54.5 billion won (US$45.53 million) as part of its expansion strategy despite the pandemic.

This file photo, taken July 1, 2020, shows Jeju Air and Eastar Jet's planes at Incheon International Airport, west of Seoul. (Yonhap)

This file photo, taken July 1, 2020, shows Jeju Air and Eastar Jet’s planes at Incheon International Airport, west of Seoul. (Yonhap)

The deal had been at risk of falling through despite the government’s intention to support it as the two sides failed to narrow differences on terms of the contract.

On July 1, Jeju Air sent an ultimatum demanding Eastar Jet pay off all of its debts, estimated at up to 170 billion won (US$142 million), including unpaid wages to its employees, delayed payments to subcontractors and office operating expenses, by July 15.

But Eastar failed to meet the demand. The company said the debt payment is not part of the deal and that it is not Eastar’s duty but Jeju Air’s.

AK Holdings, the holding firm of South Korean retail conglomerate Aekyung Group, holds a 56.94 percent stake in Jeju Air.

Also on Thursday, the state-run Korea Development Bank (KDB) and the Export-Import Bank of Korea said they will withdraw their plan to extend loans worth 170 billion won to Jeju following the deal’s collapse.

The state lenders were planning to inject the capital into Jeju Air to help it take over Eastar and ride out the virus crisis.

As for possible loans to Eastar, the KDB said, “We are not considering providing financial support for Eastar.”

(Yonhap)

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