Korea Zinc's Final Card: 'Share Buyback + PEF Alliance'

Possibility of Treasury Stock Acquisition to Be Decided Early This Week
Defense of Management Rights Possible with Company Internal Cash
Cooperation Plans with Private Equity Funds like KKR Also in Preparation
Possibility of Treasury Stock Exchange with Hanwha

As the public tender offers by MBK Partners and Youngpoong approach their deadline, Korea Zinc is expected to launch a large-scale counter public tender offer on the 2nd. The most likely final card to complete the management rights defense strategy is a combination of ‘share buyback + private equity fund (PEF) alliance.’

According to industry sources on the 30th, the possibility of Korea Zinc acquiring its own shares will be decided as early as this afternoon. When MBK started the public tender offer, it filed an injunction with the court to prevent Korea Zinc, its affiliates, and Korea Investment & Securities from purchasing treasury shares during the tender offer period. The Capital Markets Act stipulates that during the tender offer period, the tender offeror and its special related parties cannot purchase shares of the target company by means other than the tender offer. The court held a hearing on the 27th and plans to make a decision after receiving written opinions from both sides by today.

If the court accepts Korea Zinc’s claim that "Youngpoong and Korea Zinc are no longer special related parties," allowing the purchase of treasury shares during the tender offer period, Korea Zinc plans to immediately hold a board meeting to buy back shares. In that case, Chairman Choi will be able to defend management rights using the company’s internal cash without raising funds externally.

Chairman Choi Yoon-beom of Korea Zinc and Advisor Jang Hyung-jin of Young Poong. [Photo provided by each company]

Korea Zinc and Korea Investment & Securities signed trust contracts for share buybacks worth 150 billion KRW and 400 billion KRW in May and last month, respectively. Recently, they issued commercial paper (CP) to raise an additional 400 billion KRW. Combining net cash of 800 billion KRW, 400 billion KRW raised through CP issuance, and borrowings from financial institutions, Korea Zinc is confirmed to have secured liquidity of about 2.5 trillion KRW. This exceeds the maximum public tender offer funds of 2.2686 trillion KRW by MBK and Youngpoong.

If the court prohibits Korea Zinc from buying back shares during the tender offer period, Korea Zinc plans to respond by cooperating with private equity funds (PEFs) as a ‘Plan B.’ It is known that during the tender offer period, Korea Zinc has been in contact with global PEFs such as the US-based Kohlberg Kravis Roberts (KKR), Bain Capital, and Meritz Financial Group to discuss funding for a counter public tender offer. To this end, they are currently preparing procedures such as establishing a special purpose company (SPC) that will be the actual entity for the counter tender offer, depositing tender offer funds, issuing letters of commitment (LOC), and consulting with the Financial Supervisory Service.

If they proceed with the counter public tender offer, Chairman Choi’s side is likely to propose a tender offer price of at least 800,000 KRW, considering the 750,000 KRW tender offer price proposed by MBK and Youngpoong. The stake needed to defend management rights is about 6%, and if the tender offer is made at 800,000 KRW, the required funds are estimated to be approximately 1.3 trillion KRW.

However, since the Choi family holds only 15.6% of Korea Zinc shares, there is a limitation that shareholder agreements to guarantee management rights may be disadvantageously concluded if they proceed with the SPC and counter tender offer. Applying the typical loan-to-value (LTV) ratio of 40% for listed companies, the funds that can be raised through stock-backed loans amount to only 900 billion KRW. Considering the temporary surge in stock prices due to the management rights dispute, the stock value may be evaluated lower, further reducing the amount available for loans.

The last variable in Korea Zinc’s response is Hanwha. Hanwha, holding a 7.76% stake in Korea Zinc, has been considered a likely strategic investor (SI) candidate and a friendly force to Chairman Choi’s side. So far, Hanwha has drawn a line, indicating a low possibility of directly investing tender offer funds. Accordingly, a plan for Hanwha to secure voting rights by exchanging treasury shares is also being discussed. Although Korea Zinc’s treasury shares (2.4%) do not have voting rights, if sold to friendly parties, they would gain voting rights.