MBK’s Korea Zinc takeover attempt to spur search for white knights

North Asia-focused private equity firm MBK Partner Ltd.’s attempt to take control of Korea Zinc Inc. and the country’s plan to require the cancellation of treasury shares are expected to spur local companies to seek white knights to protect their management rights.

South Korea’s online giant Naver Corp., the flag carrier Korean Air Lines Co., chemical and auto parts maker KCC Corp. and petrochemical manufacturer Kumho Petrochemical Co. are potential friendly investors to help other companies maintain their control, investment banking industry sources said on Sunday.

Potential targets of hostile bids from private equity firms or hedge funds are likely to exchange their treasury shares with those white nights to protect management rights, the sources said.

“South Korea does not have strong measures such as a poison pill to keep management control,” said one of the sources. A poison pill defense involves the sale to shareholders of price-discounted shares to protect a company from a hostile takeover by an activist individual investor, company, or institutional investor.

“Financial watchdogs’ tougher regulations on treasury shares are also likely to speed up the search for white knights.”

The government is considering requiring the cancellation of treasury shares to improve shareholder value, which could remove companies’ measures to protect their control. The move is expected to cause firms to sell treasury stocks to white knights, instead of cancelling them, the sources said.

ATTACKS FROM FOREIGNERS

South Korean conglomerates were fretted in the late 1990s when US hedge fund Tiger Management LLC. tried to take control over the Northeast Asian country’s top telecom carrier SK Telecom Co. Monaco-based Sovereign Asset Management waged a battle to force reform upon the flagship of South Korea’s second-largest conglomerate SK Group in 2003, while the world’s No. 2 steelmaker ArcelorMittal S.A. attempted a hostile takeover of a smaller South Korean rival POSCO in 2006.

To defend against such attacks, those South Korean companies sold their treasury shares to other local companies and made them white knights.

Tiger tried to change SK Telecom’s executives after buying a 6.66% stake in the telecom service provider. The South Korean company exchanged treasury shares with those of POSCO, KT&G Corp. and HD Hyundai Heavy Industries Co, formerly Hyundai Heavy Industries Co.

SK Inc., the group’s holding company, sold treasury shares equivalent to a 10.41% stake, to Hana Bank, Shinhan Bank, Korea Development Bank, Pantech & Curitel and Japan’s Itochu Corp.

POSCO asked Hyundai Heavy and local banks to help fight against ArcelorMittal.

Those takeover targets succeeded in defense from hostile bids from foreign companies thanks to coalitions with white knights. Those alliances were gradually broken up as hostile takeover threats from foreigners faded, causing those white knights to sell others’ stocks they bought.

MBK was expected to rekindle such alliances as the Seoul-based private equity firm secured a large enough stake in Korea Zinc through a tender offer to take control of the world’s largest lead and zinc smelter, industry sources said.

NAVER

Naver, Korean Air, KCC and Kumho Petrochemical are likely to play an important role in other companies’ defense against such attempts, the sources said.

Naver already holds a 3.08% stake in the country’s top hypermarket operator E-Mart Inc., 6.85% in fashion and cosmetics retailer Shinsegae International Co., 7.82% in brokerage house Mirae Asset Securities Co., 7.85% in logistics company CJ Logistics Corp., 4.99% in entertainment giant CJ ENM Co. and 0.99% in Korean Air’s holding company Hanjin KAL Corp.

The online behemoth formed white knight alliances with Hanjin Group, Shinsegae Group, CJ Group and Mirae Asset Group as CJ Logistics, CN ENM and E-Mart also have stakes in Naver – 0.64%, 0.3% and 0.24%, respectively. Mirae Asset Securities also has 1.73%.

That helped Naver founder and Global Investment Officer (GIO) Lee Hae-jin maintain his control although he is the third-largest shareholder with 3.77%. The company’s top shareholder is South Korea’s National Pension Service (NPS) with 7.78%, followed by global leading asset manager BlackRock Inc. with 5.05%.

HANJIN, KCC

Hanjin Group has expanded its friendly investor networks by exchanging stakes with Hanil Holdings Co., Hanil Cement Co., GS Retail Co., Hyosung Corp. and others since its fight against a local activist fund KCGI Co.

KCC is a leading white knight for South Korean conglomerates as the company has a 9.57% stake in Samsung Group’s de facto holding firm Samsung C&T Corp., 12% in Hyundai Corporation Holdings Co., 1.79% in HDC Holdings Co., 3.91% in HD Korea Shipbuilding & Offshore Engineering Co., 2.37% in Hyundai Development Company and 4.25% in HL Holdings Corp.

KCC bought shares in Samsung C&T in 2012 and 2015 while supporting the company when it fought against US activist fund Elliott Investment Management LP in 2015.

Write to Ik-Hwan Kim at lovepen@hankyung.com
 
Jongwoo Cheon edited this article.