Korea Zinc to start buying back its shares worth up to 2.66 trillion won for control defense

Choi Yoon-beom, chairman of Korea Zinc, announces his position at a press conference held on October 2. Reporter Moon Jae-won

Korea Zinc, which is in a dispute with MBK Partners and Young Poong over control of the company, will start buying back its shares worth up to 2.66 trillion won from October 4. The company plans to inject 1.5 trillion won in equity capital and borrow the shortfall to defeat MBK and Young Poong’s tender offer. While this is a decision for the future of the company, it raises the question of whether it is appropriate to use such a large amount of company funds to defend the control of the current management.

There are also concerns that the future of Korea Zinc could be jeopardized regardless of the results of the tender offer, as MBK, Young Poong, and Korea Zinc all focus only on "war of money" rather than competition for future. On October 2, Korea Zinc announced that it would launch a tender offer at 830,000 won per share through a share buyback program. The stake of the tender offer is up to 15.5 percent, with a total tender offer price of 2.635 trillion won.

If the stake of private equity firm Bain Capital, which is a financial investor in Korea Zinc, is added to the tender offer, it will be up to 18 percent and the total tender offer price will be about 3.93 trillion won. This is significantly higher than the tender offer scale of MBK and Young Poong (stake of 14.61 percent, price of 2.268 trillion won), which previously raised the tender price to 750,000 won per share.

Korea Zinc said it launched the tender offer to return to shareholders and increase its corporate value in the face of hostile mergers and acquisitions (M&A). The company plans retirement of all the treasury shares acquired through the tender offer.

Earlier, it was speculated that the company would use a total of 2.7 trillion won in short-term borrowings, including a 1 trillion won private placement bond issued by Merits Securities, for the tender offer, but the company is using 1.5 trillion won in equity to pay for the tender offer. “We will use 1.5 trillion won of our own money and if it is not enough, we will pull out (borrowings),” an official at Korea Zinc said on October 3.”(Private placement bonds) will be issued when necessary.”

The question is appropriateness. Share buybacks are a legitimate means of defending control, but spending company funds on them can be seen as privatizing for the private interests of incumbent chairman Choi Yoon-beom. It is not appropriate to use company funds to support executives who are “agents” in a corporation that is funded by shareholders.

“It is not a good direction for individuals to use company money to buy and do retirement of treasury shares to protect their control,” said Lee Chang-min, a professor at Hanyang University. ”The right way is for the Choi family to compete by buying shares with their own money.”

The tender offer will require a huge amount of equity capital, amounting to 17 percent of the company's net assets (about 8.79 trillion won), which will add to its financial burden and may reduce its investment capacity. The return to shareholders is also unclear. Normally, share buybacks are used to increase the value of undervalued stocks, but in the case of a tender offer, the stock price temporarily surges, so the effect of returning to shareholders is halved by buying and doing retirement of shares at a high price.

In response, a Korea Zinc official said, "Shareholders support the chairman because they believe the direction fits well with the national strategic industry or the global environment. (The tender offer) is not intended to protect the chairman or maintain control."

There are concerns that Korea Zinc, MBK, and Young Poong could fall victim to the “winner's curse” even if they win the bidding war, as all companies are pouring huge amounts of money into the tender offer.

※This article has undergone review by a professional translator after being translated by an AI translation tool.