Korea Zinc, MBK stake everything in ownership battle

Kim Kwang-il, center, a partner at MBK Partners, speaks during a press conference at Lotte Hotel Seoul, Sept. 19. Yonhap

Both Korea Zinc and an alliance between private equity firm MBK Partners and Young Poong are making last-ditch efforts in their escalating battle to secure management rights over the world’s largest zinc smelter.

Korea Zinc Chairman Choi Yun-beom held an emergency meeting with the media, Wednesday, announcing the firm's offer to purchase company shares at 830,000 won ($629) per share, a higher price than the tender offer price proposed by MBK.

The grandson of the firm’s co-founder is accused by the MBK-Young Poong alliance of breach of trust and must therefore prevent the coalition from entering the board of directors.

MBK joined forces with Young Poong, which is run by the family of the other co-founder and the current largest shareholder of the smelter. It must win the high-profile ownership fight too, in order to maintain its reputation as Northeast Asia’s largest private equity firm.

MBK launched a tender offer on Sept. 13 that runs until this Friday, aiming to become the smelter's largest shareholder and oust Choi. On Sept. 26, it raised its tender offer price to 750,000 won per share from 660,000 won, intensifying its offensive.

Currently, Choi and his allies hold approximately 34 percent of all the shares, while MBK and Young Poong own 33.1 percent.

Excluding the National Pension Service’s 7.6 percent and Korea Zinc’s treasury shares at 2.4 percent, the remaining 23 percent is the decisive factor. It is expected that one side must acquire over 6 percent of the shares to gain the upper hand.

Korea Zinc's defense

Korea Zinc and Choi are putting all of their efforts into thwarting the MBK-Young Poong alliance, pursuing a strategy of defense through treasury stock buybacks at a price higher than the tender offer price proposed by MBK.

The chairman announced that the firm's board of directors approved plans to pursue a tender offer for treasury stocks worth approximately 2.7 trillion won to enhance corporate value and protect shareholders' interests.

"The number of shares scheduled to be acquired amounts to 3,209,009 shares, which represents 15.5 percent of the total issued shares of Korea Zinc, with a purchase price of 830,000 won per share," Choi said during a media conference.

"All the treasury stocks acquired will be canceled to enhance shareholder value."

Choi said Bain Capital, a U.S.-based private equity firm, agreed to participate as a co-acquirer, planning to invest approximately 430 billion won to acquire 517,582 shares, which corresponds to 2.5 percent of the total.

"The total number of shares that Korea Zinc and Bain Capital plan to acquire is 3,726,591 shares, accounting for 18 percent, with a total value of about 3.1 trillion won," Choi said.

The announcement came after a court ruling earlier in the day, which dismissed MBK’s injunction request and decided that the smelter’s buyback of treasury shares is permissible.

When MBK initiated the tender offer, it filed for a temporary injunction with the Seoul Central District Court to prevent Korea Zinc and its affiliates from buying back their treasury shares.

The Capital Market Act prohibits the tender offer party and its related parties from increasing their stakes through means other than the tender offer during the offer period to prevent potential stock price manipulation.

MBK claimed Korea Zinc qualifies as a related party in its tender offer under this law since the smelter is an affiliate of Young Poong. In response, Korea Zinc contended that it cannot be regarded as a related party since MBK attempted a “hostile takeover.”

"The court's decision clearly confirmed the legality of executing a series of actions to acquire treasury stocks in a hostile takeover situation," a Korea Zinc official said.

In response to the court ruling, MBK maintained its existing position, stating that the smelting firm’s buyback of treasury shares could lead to a breach of trust. The alliance contended that since the stock price is already abnormally high during the tender offer period, purchasing treasury shares at an even higher price would constitute an act detrimental to the company.

Regarding this, Korea Zinc argued that even if the purchase price for the treasury stocks is set higher than the market price, it does not constitute a breach of fiduciary duty since it is an action that returns profits to the company's shareholders.

Korea Zinc Chairman Choi Yoon-beom speaks during a press conference at the Grand Hyatt Seoul, Wednesday. Yonhap

MBK's offensive

The MBK-Young Poong alliance, for its part, filed an additional injunction request to halt the smelting firm's treasury stock acquisition process.

MBK said its tender offer was aimed at improving the smelter’s corporate governance, which Choi severely undermined. The private equity firm accused Choi of having sought to privately exploit and take control of the company and paralyze the firm’s board of directors.

In one example, Choi invested approximately 560 billion won of Korea Zinc’s funds into OneAsia Partners, a private equity firm run by his middle school classmate, with the total loss estimated at 137.8 billion won, or minus 24.8 percent, as of June.

Although MBK is Northeast Asia’s largest private equity firm, the financial burden is significant, as the required funds have increased from the initial 1.99 trillion won to 2.27 trillion won due to the raised tender offer price.

Out of the 2.27 trillion won, 1.8 trillion won was borrowed, with a maturity date set for June next year and an interest rate of 5.7 percent. By the end of the nine-month term, the interest alone will amount to approximately 76.6 billion won. There is also the possibility that the tender offer price could be raised once more.

This is leading to speculation that even if MBK successfully secures management control of the zinc smelter, it could suffer a hit to its profitability. Nevertheless, MBK must ensure success this time.

In December last year, MBK failed to gain control of Hankook & Company, the parent company of Hankook Tire, as its tender offer failed to secure enough subscriptions.

If MBK loses Korea Zinc’s ownership fight, which has garnered interest not only domestically but also internationally, it would leave a lasting blemish on its strategy and reputation. This is why the private equity firm has been preparing for an extended period.

Kim Kwang-il, an MBK partner overseeing the Korea Zinc deal, said that his firm is not considering the possibility of failure this time.

“In the case of Hankook & Company, it was structured to strengthen certain major shareholders, resulting in a subscription rate of about 8 percent,” he said.

“For Korea Zinc, the situation is different as we have already entered into a management cooperation agreement with Young Poong, the largest shareholder (of Korea Zinc), making the target of securing at least 7 percent of shares from institutional shareholders a feasible goal.”

Kim Dae-jong, professor at Sejong University's school of business, warned that, if the two sides continue to engage in fierce competition, stock prices will keep rising and both sides will face a heavy financial burden, potentially leading to a winner's curse.

"It is true that Chairman Choi's side has gained an advantage since he is now able to acquire treasury stocks following the court ruling," Kim said.

"However, I hope both sides will come together, considering what is beneficial for the national economy, as Korea Zinc is essential for supplying raw materials crucial to the Fourth Industrial Revolution."