MBK "Chairman Choi Yoon-beom's White Knights Have No Exit Strategy"

MBK Claims "Sumitomo's Stake Acquisition in Japan is a Breach of Fiduciary Duty"
SoftBank and Bain Capital Enter but No Exit Strategy Available

Amid predictions that Korea Investment & Securities (hereinafter, KIS), led by Kim Nam-gu, chairman of Korea Financial Group, will launch a counter-tender offer against Korea Zinc due to his close relationship with Chairman Choi Yoon-beom of Korea Zinc, MBK Partners has forecasted that the unclear exit strategies of foreign investors who acquired shares at the elevated tender offer price will pose a stumbling block.

On the 23rd, MBK stated, "If raw material suppliers or partners such as Japan's Sumitomo purchase shares, due to their nature, they will seek reciprocal benefits, which could result in transactions detrimental to the company from a long-term perspective. In such cases, Chairman Choi could face charges of breach of fiduciary duty."

They added that if the process is pushed forward hastily without identifying the final investor due to time constraints, KIS or a third party acting as a temporary equity provider might offer short-term financing without knowing the repayment schedule, exposing them to excessive risk.

Currently, there are roughly two scenarios being discussed in the capital market industry regarding KIS's counter-tender offer.

First, final investors such as Japan's SoftBank, U.S.-based private equity Bain Capital, or raw material suppliers and partners from Japan, Europe, or Australia step in to purchase Korea Zinc shares at a counter-tender offer price higher than the market price, with KIS providing bridge loans for about a year due to time constraints. This is the least burdensome scenario for KIS.

However, the problem with SoftBank or Bain Capital is the lack of an exit strategy. When shares are acquired at a price elevated by the tender offer, it becomes impossible to sell them in the stock market as the stock price reverts.

Chairman Choi's side, holding 1.8% of Korea Zinc shares, lacks the financial capacity to compensate for losses incurred by SoftBank or Bain Capital after a stock price decline. Consequently, they would have no choice but to seek investment recovery through a management rights sale, including the Choi family's shares. This is the same form as the alliance between the Jang family and MBK Partners, which Chairman Choi had criticized, leading to a self-contradiction.

The so-called friendly shareholders that Chairman Choi refers to, such as Hyundai Motor, Hanwha, and LG, have not reported a 5% joint sale agreement, making joint sales impossible. Moreover, since they have business cooperation relationships with Korea Zinc, there is no reason to sell. Ultimately, compared to the current largest shareholders, 'MBK Partners + Jang family,' the 'SoftBank (or Bain Capital) + Choi family' shareholding ratio is lower, making investment recovery through management rights sales practically impossible, effectively leaving no exit strategy.

It is possible for suppliers or partners like Trafigura, which already holds some Korea Zinc shares, or others such as Glencore or Japan's Sumitomo, to purchase shares at a high price. These parties have less need for investment recovery. However, such transactions are likely to become breach-of-fiduciary-duty deals that sacrifice Korea Zinc's long-term interests to defend Chairman Choi's personal management rights, raising the probability of problems.

Suppliers or partners, having acquired shares at a high price, seek reciprocal benefits by obtaining high margins (prices) in transactions with Korea Zinc or forming collusive relationships under the guise of alliances to secure additional profits. Japan's Sumitomo, currently mentioned by name, can be considered one of these suppliers or partners.

The second scenario involves failing to find a final investor for the reasons above and raising temporary (bridge) short-term funds for up to about one year to conduct the counter-tender offer. In this case, KIS provides bridge loans, and a foreign private debt fund supplies only bridge equity.

This means that without a determined final investor and without knowing when repayment will occur, both the securities firm and the foreign private debt fund take on risk by providing short-term financing, making it an unreasonable investment with low likelihood. In particular, KIS would bear risks exceeding the limits allowed under various loan-related regulations of the Capital Markets Act, and as KIS is already classified as a friendly shareholder of Chairman Choi, issues regarding violations of Article 35 of the Capital Markets Act related to the major shareholder could arise.

While it is possible to consider receiving loss compensation (or subordinated investment) from Chairman Choi's side, even in this case, securing sufficient amounts to meet the loan-to-value (LTV) ratio is difficult, and providing large-scale short-term loans or funds without guarantees of repayment remains exceptional.

A stock market insider warned, "There are numerous vague rumors intended to stir up speculation about the possibility of a counter-tender offer," adding, "These increase stock price volatility and encourage speculative buying, so when the stock price reverts after short selling, the damage will ultimately fall on small shareholders." Disseminating such rumors may be punishable as market disorderly conduct prohibited under Articles 178 or 178-2 of the Capital Markets Act.