[Click eStock] "Posco's Holding Company Plan: Human Split More Positive for Stock Price Than Physical Split"

[Asia Economy Reporter Song Hwajeong] Kiwoom Securities maintained its 'Buy' rating and target price of 440,000 KRW on POSCO, which saw its stock price surge due to news of its transition to a holding company, cautioning against excessive optimism.

Following news that POSCO is pursuing a holding company transition, its stock price surged up to 9% intraday the previous day. According to reports, the holding company transition is likely to involve splitting into an operating company engaged in steel manufacturing and an investment-focused holding company, with POSCO’s operating company and major affiliates becoming subsidiaries under the holding company. This is expected to be approved at the board meeting on the 10th and finalized at a special shareholders' meeting in January next year.

The split method is analyzed to be more positive for the stock price if it is a spin-off by incorporation rather than by absorption. Researcher Lee Jonghyung of Kiwoom Securities explained, "Considering that POSCO held 9.9% of its own shares as of the end of Q3 this year and has a net cash position of 2.7 trillion KRW on a separate basis, there is a possibility of a spin-off by incorporation. Typically, spin-offs by incorporation facilitate the use of treasury shares, while spin-offs by absorption make fundraising easier."

In a spin-off by incorporation, the operating company (mainly a newly established corporation) and the holding company (mainly the surviving corporation) are separated, and existing POSCO shareholders receive shares in both companies, so there is no change in control. During the split, the operating company receives shares equivalent to the 9.9% treasury shares it held before the split, and later the holding company will pursue a share swap (paid-in capital increase) with the operating company’s shareholders through a contribution in kind to secure the holding company’s required stake of over 30% in the operating company. The researcher noted, "However, since the National Pension Service holds 9.75% and is the largest shareholder, this share swap process after the spin-off by incorporation could be a burden."

In a spin-off by absorption, the split operating company becomes a 100% subsidiary of the holding company, and existing POSCO shareholders maintain the same stake in the holding company without any change in control. Up to this point, there is no change, but if the holding company later raises funds by selling part of its stake in the operating company to a third party through listing or other means, the stakes of existing POSCO shareholders and the holding company in the operating company will be diluted.

The researcher said, "In theory, corporate value is the same regardless of the split method, but spin-offs by incorporation may be more positive for the stock price. From a shareholder’s perspective, after a spin-off by incorporation, shareholders directly hold shares in both companies, increasing future options and reflecting some of the value of treasury shares in corporate value. Also, many companies have seen stock price weakness after announcing spin-offs by absorption due to concerns over shareholder rights dilution in the operating company."

He suggested that it is necessary to approach from the perspective of the recent potential recovery in the Chinese steel industry rather than focusing solely on the holding company transition. The researcher said, "Since the exact decision on the holding company transition and specific methods have not yet been disclosed externally, it is necessary to be cautious about being overly positive on POSCO’s stock price based solely on the news of pursuing a holding company transition. Recently, China’s real estate loan regulations have been eased, and the November manufacturing PMI in China has shown rebound signals. Approaching from the perspective of a possible recovery in the Chinese steel industry, which has been sluggish since May this year, the current stock price is sufficiently attractive from a buying perspective."