Fiery family feud is opportunity for Korea Inc

YoungPoong

16/10/2024 06:28

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, Oct 16 (Reuters Breakingviews) - South
Korea's latest corporate saga is a hot mess. The battle for
control of $12 billion Korea Zinc  010130.KS  between its two
founding families has quickly turned acrimonious, with each side
crying foul over the other's tactics. In the past, that might
just have been part of the game. But now Seoul has a chance to
show it can tackle Korea's deep-rooted corporate governance
problems. 
        The feud engulfing the world's top zinc smelter traces
back to an informal agreement between its two founding houses
five decades ago. One clan, the Chois, would manage Korea Zinc
and the other, the Changs, would manage an affiliate metals
producer, Young Poong  000670.KS . The two companies, which held
stakes in each other, also had close business ties.
    That understanding has now fallen apart. Korea Zinc, led by
third-generation scion Yun B. Choi, bet on risky new ventures
like battery materials, and last year nixed a longstanding
agreement to treat sulphuric acid from Young Poon's smelter.
Adding to the animosity is the fact the fortunes of Korea Zinc,
poised to become a major global electric vehicle battery
supplier, have vastly diverged from money-losing Young Poon,
whose CEO was arrested recently over safety-related deaths at a
smelter. 
    Against this backdrop, in September, Young Poon, already
Korea Zinc's largest shareholder with 33%, teamed up with North
Asia-focused private equity fund MBK Partners to launch a tender
offer, aiming to secure another 14.6% of the company. Success
would have empowered them to oust Choi.
    Korea Zinc described the move as a "hostile, predatory M&A
attempt". It then countered with a controversial $2.4 billion
share buyback and roped in Bain Capital to purchase an
additional 2.5% of the company. The idea was to deter as many
investors as possible from tendering their shares to the rival
camp.  
    That appears to have worked. On Monday, Young Poon-MBK
announced it had secured just 5.3% of the shares, well short of
its goal. That puts the pair's current ownership at 38.5%,
versus the estimated 34.2% for the Chois and their allies which
include Trafigura, according to analyst Sanghyun Park from
Clepsydra Capital, who publishes on SmartKarma.
    It's a partial victory of sorts for the agitators. Their
opponent's shareholding is likely to fall short of displacing
them as top shareholders, even with the company's share buyback,
plus Bain's surprise involvement, offering a 7% premium to the
competing offer. That said, MBK and the Changs will need support
from minority owners to push through any management changes. 
        There is also another twist. MBK is accusing Korea
Zinc's board of breaching its fiduciary duty to shareholders,
misusing discretionary reserve funds and leaving the company
financially worse off, among other things. It has filed a court
injunction to stop the self-tender. The investment firm has a
point: in addition to tapping corporate funds, Korea Zinc says
it is borrowing nearly $2 billion, nearly double its current
outstanding debt, to purchase treasury shares at what is
arguably an inflated price in order to protect its chairman. 
    Meanwhile, Korea Zinc has publicly questioned MBK's
intentions for the company, fuelling fears that the private
equity group will sell key assets to Chinese buyers. It has also
raised Young Poon's poor safety and environmental track record
and the opaque nature of Young Poon's agreement to sell its
stake to MBK via call options. On Wednesday, responding to the
tender offer result, Korea Zinc blasted the pair as "crafty
grifters" and threatened civil and criminal lawsuits. 
    For now, at least, the failure of either side to secure
control has created a stalemate, elevating the power of minority
shareholders. 
    That the saga is unfolding now is timely. It shines a
spotlight on Korea's entrenched family-run conglomerates,
intertwined businesses, circular shareholding agreements and
other lapses just as officials are trying to improve corporate
governance and shareholder returns.
    And now regulators are stepping in to investigate the tender
offers for Korea Zinc. Even if the company's share buyback, for
example, is technically legal, the massive conflict of interest
ought to spur a closer examination of the rules. Seoul has an
opportunity to prove outside shareholders needn't get burned.
    Follow @mak_robyn on X
    
    CONTEXT NEWS
    Private equity firm MBK Partners and conglomerate Young Poon
have secured just over 1.1 million shares in Korea Zinc - 5.34%
of the company - through a tender offer for up to 14.6% of its
shares that closed on Oct. 14 .
    MBK and Young Poong, which as Korea Zinc's largest
shareholder already with 33%, raised the price for the second
time on Oct. 4 to 830,000 won per share to match a counter-offer
from the company.
    That took the form of a tender offer by Korea Zinc,
announced on Oct. 2, to buy back up to 2.7 trillion won ($2.03
billion) of shares, or 16% of the company, at 830,000 won per
share. Bain Capital offered to buy an additional 430 million won
of stock at the same price. 
    On Oct. 11, Korea Zinc and Bain raised the tender price by
7% to 890,000 won each. The two also increased the number of
shares they plan to acquire to 4.1 million, equating to 20% of
the company. That tender offer closes on Oct. 23.
    Young Poong and MBK said on Oct. 2 that they filed an
injunction against the share buyback.
    South Korea's Financial Supervisory Service on Oct. 8 has
launched a probe into the tender offers for Korea Zinc. Governor
Lee Bok-hyun urged the parties of an ongoing battle for control
to refrain from spreading rumours and other unfair practices
that interfere with offers from the other side, according to the
statement.

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Graphic: Battle for Korea Zinc has fired up its shares    https://reut.rs/3BPOCm8
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 (Editing by Antony Currie and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  MAK/   
robyn.mak@thomsonreuters.com))