MBK wins enough stake in tender offer to control Korea Zinc

North Asia-focused private equity firm MBK Partners Ltd. has secured a large enough stake in Korea Zinc Inc. through a tender offer to take control of the world’s largest lead and zinc smelter. It accomplished this even though its price was lower than the company’s share buyback price.

Korea Zinc shareholders, with a combined 5.34% stake or 11 million stocks, decided to sell their shares to MBK and the smelter’s top shareholder Young Poong Corp. by Monday, the last day of their tender offer, according to a regulatory filing.

The buyers are set to purchase those stocks for 830,000 won ($610.5) each, Young Poong Corp. said in the filing, lower than Korea Zinc’s buyback price of 890,000 won. The buyback could collapse, however, if a South Korean court accepts the MBK-led consortium’s request to block Korea Zinc from buying back shares, industry sources said.

MBK and Young Poong Corp. are expected to increase their stake in Korea Zinc to 38.47%. That compares with a total 38.4% stake held by Korea Zinc Chair Choi Yun-birm and his allies such as Bain Capital and Young Poong Precision Corp. The US private equity firm Bain planned to buy a 2.5% stake in the smelter.

The tender offer allows Korea Zinc to buy back only up to a 14.66% stake. Once its buyback scheme is completed, a total 17.1% stake will lose voting rights, given the existing treasury stocks of 2.4% and 0.04% owned by a cultural foundation established by Choi’s father.

The buyback would increase MBK and Young Poong Corp.’s stake with voting rights to 46.4%.

MBK and Young Poong Corp. failed in their tender offer for Young Poong Precision, which holds a casting vote with a 1.85% stake in the management dispute, as Korea Zinc raised its tender offer price to 35,000 won — higher than the PE firm's 30,000 won.

That did not affect MBK and Young Poong Corp.’s takeover as they already secured a sufficient stake in Korea Zinc, industry sources said.

TO OUST CHOI AND OTHER EXECUTIVES

MBK and Young Poong Corp. are expected to oust Korea Zinc’s current executives including Choi at an extraordinary shareholder’s meeting next month, the sources said.

They are likely to succeed at the reshuffle given that Hyundai Motor Group, with a 5.05% stake in the smelter, has yet to disclose which side it will support, fueling expectations that the world’s third-largest automaker might not support Choi.

MBK and Young Poong Corp.’s stake with voting rights is likely to grow to 49.6% if the Korean auto conglomerate does not cast a vote at the extraordinary shareholders’ meeting.

“MBK and Young Poong Corp. are predicted to win a majority if shareholders with 4 to 5% stakes such as passive funds do not exercise their votes at the meeting,” said one  source.

Korea Zinc's board of directors has 13 members, 12 of which are Choi’s allies. Chang Hyung-jin, Young Poong Group’s advisor, is the only director who joined MBK.

MBK and the group are expected to take control of Korea Zinc, which does not limit the number of its board members, if the PE firm and the group appoint 12 or more members.

MBK and Young Poong Corp. are likely to buy more stocks in the market or persuade the existing shareholders to join them for a stable takeover, the sources said.

FAILED ATTEMPT WITH HIGHER PRICE

Korea Zinc failed to attract shareholders to its share buyback program although it vowed to buy more stocks at a higher price — 890,000 won per share — than MBK and Young Poong Corp.’s tender offer price of 830,000 won each.

Many institutional investors saw legal risks from Korea Zinc’s buyback plan, according to sources.

Choi said the company has 6.1 trillion won for the buyback, while MBK and Young Poong Corp. asked a local court to ban the countermeasure against its tender offer. MBK and Young Poong Corp. said the use of discretionary reserves to buy back shares must be approved at a shareholders’ meeting.

“We will do our utmost to block Chair Choi’s share buyback,” said an MBK official.

The court is expected to issue a ruling around Oct. 21, ahead of the closing of Korea Zinc’s buyback on Oct. 23. Institutional investors may have divided their holdings to minimize legal risk and participate in both the tender offer and the buyback, industry sources said.

MBK and Young Poong Corp. also scrapped the minimum limit for public purchase to attract more shareholders.

Young Poong Group was founded by Chang Byung-hee and Choi Ki-ho in 1949. The group’s two major affiliates have been largely run by their descendants. The Chang family controls Young Poong Corp. and the electronic parts units, while the Choi family manages Korea Zinc and the non-electronics units.

Their conflicts heated up as Korea Zinc, the conglomerate’s cash cow, issued new shares to Hyundai Motor Group and swapped treasury stocks with Hanwha Corp. and LG Chem Ltd.

The smelter ramped up its efforts to terminate its decades-long business relations with Young Poong Group by dominating the boardroom of group affiliate Sorin Corp in June.

Write to Hyung-Kyu Kim, Woo-Sub Kim, Sang Hoon Sung and Jong-Kwan Park at khk@hankyung.com
 
Jongwoo Cheon edited this article.