[Initial Report] Difficult to Understand the 'National Pension Service' Stance on the 'Korea Zinc Dispute'

No Intention to Participate in Tender Offer
Uncertainties in Stock Price and Delisting After Dispute
May Miss Certain Profit Realization Opportunity

The National Pension Service (NPS) is estimated to have started purchasing shares of Korea Zinc in 2009. In February of that year, the NPS disclosed that it held a 6.12% stake (1,155,176 shares) in Korea Zinc. Previously, the stake was 0%. The average acquisition price was 79,504 KRW per share. In April of the same year, it disclosed that the stake had been reduced again to the 5% range. Since then, there have been multiple rounds of on-market buying and selling. The NPS's current stake in Korea Zinc is known to be 7.60%.

The high-priced tender offer for Korea Zinc shares presents an excellent opportunity for the NPS to realize high returns. The MBK Partners-Young Poong alliance and Korea Zinc proposed tender offer prices of 830,000 KRW and 890,000 KRW, respectively. Even assuming the NPS's average purchase price for Korea Zinc shares is as high as 300,000 to 400,000 KRW, the simple rate of return exceeds 100%. Considering the 22% tax on gains from over-the-counter stock trading, the returns remain substantial.

There is another incentive for the NPS to participate in the tender offer. After the tender offer ends, there is speculation that Korea Zinc could be delisted. It is expected that the number of Korea Zinc's freely tradable shares will drastically decrease or that it will fail to meet the ‘share distribution requirement,’ a prerequisite for maintaining listing. A Korea Exchange (KRX) official explained, "If the listing criteria such as freely tradable shares are not met at the time of next year's business report submission, the company will be designated as a ‘management item,’ and if improvements are not made within one year, it will be delisted."

It will be difficult for the number of freely tradable shares to increase significantly again if Korea Zinc buys back and cancels treasury shares worth around 3 trillion KRW. The Choi family, including Chairman Choi Yoon-beom of Korea Zinc, major corporations such as Hanwha, Hyundai Motor, LG Chem?who are considered allies of Chairman Choi?and the MBK alliance are likely to continue holding their stakes amid ongoing disputes. Excluding up to 20% of treasury shares subject to cancellation, there will be very few freely tradable shares left in the market. Individual investors are also expected to exit en masse through participation in the tender offer or market sales.

If freely tradable shares run out, it will become even more difficult for the NPS to dispose of its holdings on the market. In a situation with low trading volume, even a small amount of selling pressure can cause the stock price to plummet. To avoid these risks, the NPS has two options: participate in the tender offer or sell its holdings on the market before the tender offer.

An NPS official previously stated the basic position that "the NPS will not participate in a tender offer that appears to side with one party in a management dispute." However, this reasoning is hard to accept. The NPS, which should prioritize maximizing returns on the public’s retirement funds above all else, sounds like it is willing to forgo a clear opportunity to realize profits just to avoid appearing to take sides.

A former NPS official evaluated, "Considering the high tender offer price for Korea Zinc shares and the uncertainties regarding the stock price and potential delisting after the tender offer, deciding not to participate for reasons other than ‘returns’ could be an operational decision that violates the NPS’s ‘fiduciary duty principle’ responsible for managing the public’s retirement funds." However, they added, "Decisions and execution regarding operational strategies fall under the discretion of the management headquarters."

If the NPS misses this clear opportunity to realize profits right in front of it, subscribers who entrust part of their monthly salary will inevitably keep asking for a satisfactory explanation. Without an appropriate answer, this decision can only be seen as influenced by criteria other than returns or by some form of pressure.