[Why&Next] Sudden Withdrawal of Holding Company Conversion... Binggrae's Value-Up 'Collateral Damage'

Binggrae's Holding Company Transition Halted
Korea Exchange May Have Rejected Binggrae's Spin-off Application
'Treasury Share Magic' Blocked, but Controlling Family's Dominance Grows

Domestic food company Binggrae abruptly withdrew its plan to transition into a holding company, sparking widespread speculation. Although the team leader who devised the holding company transition plan was promoted, indicating ambitious internal efforts at Binggrae, the plan was canceled just over two months after the board's decision. Industry insiders analyze that the government's strengthened policy to protect minority shareholders has put the brakes on Binggrae's conversion of treasury shares.

According to the Financial Supervisory Service's electronic disclosure system on the 12th, Binggrae held a board meeting on November 22 last year and decided on a spin-off for the holding company transition. At the time, Binggrae stated, "To pursue management efficiency, establish a foundation for sustainable future growth, and achieve strategic goals of maximizing corporate and shareholder value, we resolved to transition to a holding company system through a spin-off."

However, the company decided to withdraw the entire spin-off plan through a board resolution on the 24th of last month, just before the Lunar New Year holiday. The reason given was that after communicating with various stakeholders, it was deemed necessary to prepare clearer measures to enhance shareholder value before the spin-off and holding company transition, and that it would be more appropriate to pursue the holding company transition once the future business direction becomes more clearly visible.

Did the Korea Exchange Reject Binggrae's Spin-off Application?

Industry insiders say that the Korea Exchange did not approve Binggrae's application for a 'spin-off re-listing preliminary review.' This was due to concerns that existing Binggrae shareholders might suffer losses. When a company applies for spin-off re-listing, the exchange reviews whether the company meets qualitative and quantitative listing requirements, and it appears that the exchange found issues with Binggrae's spin-off plan in terms of investor protection.

Previously, in November last year, the exchange revised its due diligence checklist related to corporate restructuring and mandated that companies must establish and implement investor protection plans when applying for spin-off re-listing. Following amendments to the listing regulations enforcement rules in April last year, an item was added requiring underwriters to evaluate the financial status of both the surviving and newly established companies after the spin-off, as well as efforts to protect shareholders to prevent the so-called 'treasury share magic' during the due diligence stage.

This was because, in past spin-off processes, while the controlling shareholder's governance was strengthened, corporate value declined, causing frequent harm to minority shareholders.

According to a report published earlier this month by the Korea Capital Market Institute analyzing listed companies' spin-offs from 2000 to 2021, the so-called 'treasury share magic' was utilized during holding company transitions. Treasury share magic refers to the phenomenon where, during a company's spin-off, treasury shares of the existing company are allocated as new shares of the newly established company, thereby strengthening the controlling shareholder's control.

These listed companies increased the controlling shareholder's stake in both the surviving and newly established companies by 15 percentage points and 11 percentage points respectively through spin-offs and paid-in capital increases via contributions in kind, significantly boosting control. Conversely, the market capitalization share held by external shareholders decreased by 6 percentage points compared to before the spin-off, indicating distortions not only in control but also in wealth distribution, the report pointed out.

In fact, in a spin-off, shares of the newly established company are allocated to existing shareholders, which can reduce minority shareholder harm compared to a physical division. However, spin-offs can reduce each company's scale, diminishing market influence, and company profits that should go to shareholders may be used for initial costs of the new entity.

Most importantly, if both the parent and subsidiary companies are listed after a spin-off, corporate value may be double-counted. The parent company's value consists of its own business segments and the value of its subsidiary shares, but when the subsidiary is listed, investors discount the value of the parent's subsidiary shares. Since the subsidiary's value is already reflected in the stock market, a holding company stock price discount inevitably occurs.

Controlling Family's Dominance Expands Sharply... Controversy Over 'Cunning' Succession

Previously, Hyundai Department Store Group expanded the controlling family's dominance by spinning off Hyundai Green Food. As of the end of the first half of 2022, Hyundai Green Food's shareholding was 23.8% by Jung Gyo-seon, Chairman and CEO of Hyundai Home Shopping, 12.7% by Jung Ji-sun, Chairman of Hyundai Department Store Group, and 1.9% by Jung Mong-geun, Honorary Chairman of Hyundai Department Store Group, totaling 38.4%. After the spin-off, as of the end of the third quarter of 2023, Hyundai GF Holdings (formerly Hyundai Green Food) shares were held 38.1% by Chairman Jung Ji-sun, 28.0% by Chairman Jung Gyo-seon, and 8.0% by Honorary Chairman Jung Mong-geun, totaling 74.1%.

If Binggrae proceeds with a spin-off, the controlling family's dominance, including Chairman Kim Ho-yeon, is expected to expand easily. As of last year, Binggrae's major shareholders were Chairman Kim Ho-yeon (36.75%), Kim Foundation (2.03%), logistics company Jedae (1.99%), and Hyundam Bookstore (0.13%), totaling 40.89%. If Jedae participates in Binggrae Holdings' paid-in capital increase via contribution in kind, Jedae could become a shareholder of Binggrae Holdings. Jedae's major shareholders are Chairman Kim Ho-yeon's eldest son Kim Dong-hwan (33%), eldest daughter Kim Jeong-hwa (33%), and Kim Dong-man (33%). Accordingly, a control structure of 'Chairman Kim Ho-yeon's children → Jedae → Binggrae Holdings → Binggrae' could be established.

During the holding company transition, Binggrae blocked the 'treasury share magic' by canceling all 10.25% of its treasury shares, encouraging shareholders to participate in the public tender offer. However, since minority shareholders generally prefer shares in the operating company, they tend to avoid participating in the holding company's paid-in capital increase via contribution in kind, which could increase Jedae's stake in Binggrae Holdings. This has led to controversy over a 'cunning succession' as Chairman Kim Ho-yeon's children could expand their control.

Industry insiders expect Binggrae to possibly pursue spin-off and holding company transition again in the future, especially since Chairman Kim, born in 1955, is elderly and succession issues involving President Kim Dong-hwan need resolution. A Binggrae official said, "As disclosed, after reflecting various stakeholders' opinions and thorough review, we judged that now is premature. While there is a possibility of re-pursuit, it is not the case yet."

This content was produced with the assistance of AI translation services.