Nam Hyun-woo has worked as a staff writer at The Korea Times since 2013, mostly covering business and politics. He currently belongs to the Business Desk where he covers topics such as emerging tech, AI, ICT and Korea's chaebol community. Prior to joining the team, he was the paper's correspondent for the presidential office of Korea during the Yoon Suk Yeol and Moon Jae-in administrations.
Local brokerages cast high hopes for LG spinoffs
LG's spinoff plan
By Nam Hyun-woo
By Nam Hyun-woo
Domestic brokerages are anticipating a positive impact after LG Group's planned spinoff of five companies under its wing, saying the changes will spur each firm to put greater efforts into improving their value.
U.S. hedge fund operator Whitebox Advisors earlier threatened legal action as part of its opposition to the plan on fears of discounts to the value of LG Corp., the remaining holding firm of LG Group after the spinoff.
“The spinoff of the companies will have limited impact on LG Corp.'s value, because existing shareholders of LG Corp. will own both companies' shares, while the stock splitting ratio of LG Corp. and the new holding firm of the spinoffs is limited to 0.911 : 0.089,” SK Securities analyst Choi Kwan-soon said, Monday.
On Nov. 26, LG Corp. announced it will separate affiliates including LG Hausys, LG MMA, Silicon Works and LG International by creating a new holding firm. Of them, LG International's subsidiary Pantos will also be placed under the new holding firm controlled by Koo Bon-joon, uncle of LG Group Chairman Koo Kwang-mo.
The move was interpreted as the LG owner family's tradition of separating businesses when its leadership is succeeded to the first son of the owner family's next generation. For example, LIG Group was separated from LG in 1999 with the scion of LG Group founder Koo In-hwoi taking control of LIG. LS Group was also separated in 2003 with the founder's brothers taking control of it. GS Group was also separated from LG, with Huh Chang-soo, the grandson of LG Group co-founder Huh Man-jung, taking LG's construction unit out in 2003.
By separating the companies, LG Group has been preventing feuds between owner family members over control of the conglomerate.
Over this plan, however, Whitebox Advisors on Dec. 14 sent a letter to LG Corp., demanding LG Group stop the spinoff plan. Sources told The Korea Times that the hedge fund operator is considering legal actions as LG Corp. refuses the demand. Whitebox is presumed to hold around a 0.6 percent to 1 percent stake in LG Corp.
Whitebox's rationale is the spinoff will sacrifice 9 percent of LG's cash balance, thus failing to create value for minority shareholders or LG. The fund operator also added it has questions on “why the board has unanimously approved a sub-optimal, succession-driven restructuring plan, especially one lacking a clear strategic or financial rationale.”
IBK Securities analyst Kim Jang-won said that the brokerage will not adjust its valuation on LG Corp. after the spinoff because LG International, a listed firms, has been calculated separately in evaluating LG Corp.'s value, while the market cap of LG Hausys and Silicon Works are relatively low compared to other LG Corp. affiliates.
“Remaining LG Corp. will show faster movements in its business after the spinoff,” Kim said.
“LG Corp. secured more than 1 trillion won in cash by selling stakes in its affiliates, but did not show any moves apparently due to the planned spinoff. … Though the spinoff is not directly aimed at improving corporate value, aggressive strategies after the spinoff are anticipated to improve the value of both LG Corp. and the new holding firm.”
Last year, LG Corp. sold its 35 percent stake in LG CNS and 60.1 percent stake in Serveone. The transactions fetched 1.67 trillion won in cash and cash equivalents to LG Corp. Its key units LG Electronics, LG Chem and LG Uplus also sold non-core assets to secure cash, but the group has kept a low-key approach in the M&A market.
Because of this, industry officials were expecting for LG to wait for the right timing for investments, and the spinoff will clear the path for aggressive moves.
Hi Investment & Securities analyst Lee Sang-hun also took an optimistic view on the new holding firm.
“The new holding firm will see most of its value coming from subsidiaries. Given LG International is a trading and logistics firm, the company will likely be the flagship unit of the new holding firm,” Lee said. “The new holding firm will use its treasury stocks and other tools to increase its stake in LG International, as well as carrying out new businesses and M&As to improve the firm's value.”