Analysis: Korea Zinc takeover battle tests Seoul's resolve on tackling 'Korea discount'

YoungPoong

20/11/2024 22:00

* 
      Voluntary guidelines to help lift valuations may not be
enough,
governance experts say
    

        * 
      Democratic Party, with parliamentary majority, pushing for
legislative changes
    

        * 
      Korea Zinc has withdrawn controversial share issue plan
but
still under investigation
    

  
    By Hyunjoo Jin, Cynthia Kim and Kane Wu
       SEOUL, Nov 21 (Reuters) - A takeover battle over Korea
Zinc  010130.KS  is adding pressure on Seoul to pass legislative
reforms to ensure better protections for all investors in a
country with a stock market dominated by family-run
conglomerates.
    Korea Zinc Chairman Yun B. Choi, a grandson of a co-founder,
last week agreed to scrap a controversial plan to issue new
shares in the world's largest zinc refiner to help fend off a
takeover attempt from the co-founding family's Youngpoong Corp
 000670.KS  and its partner, private equity group MBK Partners. 
    The share issue plan had infuriated many investors, as two
days before it was announced, Korea Zinc finalised a buyback at
a 25% higher price.
    Choi backed down after a regulatory probe and intense
shareholder pressure that brought international attention to
corporate governance shortcomings in Asia's fourth-largest
economy. 
    But Korea Zinc's actions under his leadership have fuelled
scepticism over whether the government's call for voluntary
efforts by companies to boost depressed stock valuations is
sufficient, according to interviews with more than a dozen
investors, governance experts, regulators and lawmakers.
    After Choi became chairman in 2022, Korea Zinc signed deals
with LG Chem  051910.KS  and Hanwha Corp  000880.KS  to invest
in each other, in an arrangement known as a cross-shareholding,
though it sold shares in the latter this month to help repay
debt. Under Choi, it also sold stock to strategic partners
including Hyundai Motor Group and Trafigura.
    "Why do you use company funds, not your own money to
increase your control?" asked Park Yoo-kyung, a managing
director at Netherlands-based APG Asset Management, who noted
Korea Zinc could have formed joint ventures or used other types
of contracts.
     Many companies in Japan are unwinding cross-shareholding
deals, which have been criticised as negative for corporate
governance because they can insulate management from having to
meet the interests of shareholders.  
    Korea Zinc said the cross-shareholdings were needed to
ensure stable partnerships as it expanded into battery
materials, hydrogen and other businesses. 
    Hahm Yong-il, senior deputy governor of the Financial
Supervisory Service, said Korea Zinc's moves had fuelled
investor doubts about board independence.
    The regulator's commitment to reforming and improving
capital markets is being tested, said Hahm, whose agency is
investigating allegedly unfair practices in Korea Zinc's
proposed share issue plan even after it was cancelled.
    
    LEGISLATION PUSH
    Korea Zinc's actions show legislation is needed to protect
the interests of minority shareholders and address the lack of
board independence, particularly at family-run conglomerates
known as chaebols, said the people interviewed by Reuters. 
    In South Korea, board members have a fiduciary duty to
perform their duties in the company's interests, but not to
safeguard shareholders' interests. 
        The Democratic Party, which has a majority in
parliament, on Tuesday proposed a commercial law revision to
extend the duty to shareholders, saying the Korea Zinc saga
added urgency to long-delayed legislation. 
    But President Yoon Suk Yeol's People Power Party and
business groups have raised concerns that companies could be
subject to attacks from overseas hedge funds if the law was
amended.  
    Yoon can veto bills, and his office this month took a step
back from its earlier positive stance on the commercial law
changes.
    In January, Yoon had pledged to address the so-called "Korea
discount" to shore up support from the country's more than 10
million retail investors, taking a leaf from Japan's corporate
governance reforms over the last few years that have drawn
interest from global investors and sent Tokyo stocks to record
highs this year.
    The Korea discount refers to a tendency for South Korean
companies to have lower valuations compared to their overseas
peers due to low dividend payouts and the dominance of chaebols
that often have weak governance practices.
    Benchmark KOSPI index  .KS11  shares traded at a
price-to-book multiple of 0.87 as of Wednesday, below an average
of 1.2 for companies on Japanese exchanges and 4.8 for the S&P
500  .SPX  in the U.S., according to data from the exchanges. 
    
    FIRST HOSTILE TAKEOVER
    Korea Zinc's Choi pledged to give up his role as chairman
and come up with measures to protect minority shareholders as he
braces for a showdown with Youngpoong and MBK at a shareholder
meeting early next year. 
    Their bid for control, if successful, would be the first
hostile takeover of a South Korean company by a private equity
fund, and should serve as a wake-up call for chaebols, according
to LSEG data.
    "What MBK is doing on Korea Zinc could potentially spur
dozens of similar disputes at some 200 locally listed Korean
companies," said Mike Cho, a business school professor at
Seoul's Korea University. 
    The country has traditionally been a tough ground for
activist investors such as Elliott, which over the last decade
made unsuccessful attempts to block deals at Samsung affiliates
and Hyundai Motor Group companies. 
    The number of activist campaigns annually in South Korea
grew more than nine-fold between 2019 and 2023, according to
Diligent Market Intelligence, though the outcomes have been
mixed.  
    "There is a buzz among local capital market players that
MBK's deal with Korea Zinc could be a game changer," said
Sanghyun Park, an analyst at Clepsydra Capital. "It's seen as a
key step to tackle the Korea discount by shaking up ownership
structures."

 (Reporting by Hyunjoo Jin and Cynthia Kim in Seoul and Kane Wu
in Hong Kong; Additional reporting by Jihoon Lee in Seoul and
David Dolan in Tokyo; Editing by Jamie Freed)
 ((hyunjoo.jin@thomsonreuters.com; 82-2-3704-5685; Reuters
Messaging: hyunjoo.jin.thomsonreuters.com@reuters.net))