Hanjin Group units including Korean Air formed Hanjin Energy to buy 32 million shares of South Korea's third-largest oil refiner at 74,979 won each, the Seoul-based airline said Monday. That is a 14 percent premium to S-Oil's closing price Monday.

The transaction, scheduled for completion on April 2, is pending government approval.

The deal may pave the way for S-Oil to fund construction of a second oil refinery and help Korean Air own part of a fuel supplier amid higher oil prices. Shareholders of Hanjin units may benefit as the offer was lower than estimated by analysts.

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For Korean Air, "the price is better than what the market expected," said Ryu Je Hyun, an analyst at Mirae Asset Securities in Seoul, who expected an offer ranging from 70,000 won to 90,000 won a share.

"We'll have to wait and see what the synergy effects are, but either way, it won't be a big burden on Korean Air."

S-Oil shares fell 1.9 percent to close at 65,900 won in Seoul, while Korean Air's stock dropped 0.3 percent to 34,250 won.

Korean Air disclosed the agreement after the end of trading in Seoul.

The purchase would make Hanjin Group the refiner's second-largest shareholder after the 35 percent stake owned by Saudi Aramco, Saudi Arabia's state-owned oil company.

The affiliates will participate in S-Oil's management, justifying the premium offered for the shares, Ryu said.

The final acquisition price may change depending on S-Oil's dividend payout, Korean Air said.

S-Oil plans to invest 3.6 trillion won to build a second crude oil refinery as demand rises in China, the company said in April last year. It did not say how it would fund the project.

Crude oil prices, which have tripled since 2001, climbed to a record US$78.40 (HK$614.95) a barrel in July.

Fourth-quarter jet fuel prices rose 6.3 percent from a year earlier to US$74.84 a barrel in Singapore after climbing to a record in August.

Hanjin Energy, established last Friday, is 82.5 percent owned by Korean Air, 14.6 percent owned by Hanjin Shipping and 2.9 percent owned by Korea Airport Service.

Korean Air sought to borrow the bulk of the acquisition cost through loans from domestic banks, officials familiar with the transaction said.

Last month Joo Ick Chan, an analyst at Daewoo Securities in Seoul, said Korean Air would have had to pay about 153 billion won annually in interest should it buy the shares at 94,600 won a share and borrow the entire acquisition cost.

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