[Exclusive] Bain Capital's 'White Knight' Investment in Korea Zinc Fails to Pass Hong Kong Office's Investment Committee

Choi Yoon-beom, chairman of Korea Zinc, who is currently engaged in a management rights dispute with Youngpoong and MBK Partners, is facing difficulties in recruiting a white knight for a counter-tender offer.

According to the financial investment industry on the 27th, Bain Capital failed to pass the investment review committee of its Hong Kong office regarding the Korea Zinc management rights defense investment. A financial investment industry insider hinted, "The investment review committee held by Bain Capital's Hong Kong office, which oversees investments in Korea, Singapore, and Hong Kong, did not approve the Korea Zinc support plan."

Bain Capital, considered the strongest ally due to close ties with Korea Zinc, faces 'brake' at Hong Kong office as investment review committee fails to pass

Bain Capital, a U.S.-based private equity fund (PEF) manager with assets under management worth 200 trillion won, has consistently targeted the Korean market. While Chairman Choi has been securing allies by contacting domestic and international partners and investment banks (IBs), Bain Capital has recently been intensively mentioned as a white knight for Korea Zinc. The industry expected Korea Investment & Securities to act as the lead manager for Chairman Choi's counter-tender offer, with Bain Capital participating as an investor.

Chairman Choi, along with Chief Financial Officer (CFO) Lee Seung-ho, who has extensive experience in global IB firms such as Morgan Stanley and Standard Chartered, has been seeking overseas investors. It is known that CFO Lee built a strong relationship with Bain Capital while advising on Bain Capital's representative deal, Carver Korea. Despite this close relationship, the Korea Zinc support plan failed to pass the investment review committee, which is interpreted as a result of the increasing legal risks for participants due to the escalating management rights dispute, the unclear exit strategies of white knights who entered at higher prices, and various controversies including allegations of breach of fiduciary duty.

According to the financial investment industry, there are roughly two scenarios for Korea Zinc's counter-tender offer in the capital market. The first scenario involves final investors such as Japan's SoftBank, U.S.-based Bain Capital, or raw material suppliers or partners from Japan, Europe, or Australia stepping in to purchase Korea Zinc shares at a counter-tender offer price higher than the market price, with Korea Investment & Securities providing support by extending a bridge loan for about a year.

This scenario is the least burdensome for securities firms. However, the problem with SoftBank or Bain Capital is the lack of an exit strategy. When acquiring shares 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, which holds 1.8% of Korea Zinc shares, lacks the financial capacity to compensate SoftBank or Bain Capital for losses after a stock price decline. Consequently, the only option is to recover the investment through a management rights sale, including the Choi family's shares. Hyundai Motor, Hanwha, and LG have not reported a 5% agreement on joint sales, making joint sales impossible. Moreover, as they have business cooperation relationships with Korea Zinc, there is no reason to sell. Ultimately, compared to the current largest shareholders 'MBK and Youngpoong,' the lower shareholding ratio of 'SoftBank and the Choi family' makes investment recovery through management rights sales practically impossible, leading to the view that there is effectively no investment recovery plan.

It is possible for suppliers or partners such as Trafigura, which already holds some Korea Zinc shares, or others like Glencore or Japan's Sumitomo, to purchase shares at a high price. Their need for investment recovery is low. However, such transactions are likely to raise issues as they may constitute breach of fiduciary duty transactions that sacrifice Korea Zinc's long-term interests to defend Chairman Choi's management rights. Suppliers or partners, having acquired shares at a high price, may seek benefits through higher margins (prices) in transactions with Korea Zinc or form exclusive trading relationships under the guise of alliances to secure additional profits.

The second scenario involves failing to find a final investor and raising temporary (bridge) short-term funds for up to about a year to conduct the counter-tender offer. Korea Investment & Securities would provide bridge loans, and foreign private debt funds would provide only bridge equity. This means providing short-term financing while bearing risks without knowing when the funds will be repaid, which is a burdensome investment for both securities firms and foreign private debt funds. In particular, Korea Investment & Securities, already classified as a friendly shareholder of Chairman Choi, could face violations of Article 35 of the Capital Markets Act related to various loan regulations by bearing risks beyond permitted limits. 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 loans or funds without guarantees of repayment in a short period remains exceptional.

The ongoing management rights dispute surrounding Korea Zinc is becoming the largest M&A in Korea. MBK, a private equity fund that started a public tender offer on the 13th in alliance with Youngpoong to secure management rights, raised its purchase price from 660,000 won to 750,000 won per share on the 26th. Based on current figures, the combined funds invested by MBK, about 3.6 trillion won, and Korea Zinc, about 1.13 trillion won, are expected to approach an unprecedented 'war of money' totaling 5 trillion won. The scale could increase further if one side raises the tender offer price. Korea Zinc, defending itself, is considering securing shares through a counter-tender offer against the Youngpoong-MBK alliance. According to the industry, Korea Zinc is reportedly in talks with Kolberg Kravis Roberts (KKR), one of the world's top three private equity funds, to secure up to about 1 trillion won needed for defense.