Disentangling Chaebol Isn’t Easy: Hyundai Glovis Block Sale Fails

http://blogs.barrons.com/asiastocks/2015/01/12/disentangling-chaebol-isnt-easy-hyundai-glovis-block-sale-failed/?mod=BOL_hp_blog_astw

January 12, 2015, 11:48 P.M. ET

Disentangling Chaebol Isn’t Easy: Hyundai Glovis Block Sale Fails

By Shuli Ren

Chairman of Hyundai Motor Chung Mong-koo and its only son Chung Eui-sun failed to sellaround $1.25 billion of shares in the car group’s logistics arm Hyundai Glovis (086280.KW), despite a substantially discounted offer price.The Chung family planned to sell a 13.4% stake in Hyundai Glovis at a 7.5-12% discount to yesterday’s market close. After the stake sale, the Chung family will hold 29.99%, from 43.4% previously. Shares of Hyundai Glovis slumped 15% today after news on the failed sale broke.

“The failure is also not very surprising given the share price’s extremely strong run over the past 12 months, rising 34.5% compared to a 4% drop in the benchmark Kospi index over the same time period,” wrote Jackie Horne at FinanceAsia, a well-read deal publication based in Hong Kong. Investors have been bidding up Hyundai Glovis betting that the Chung family wants to sell down its stakes.

The Korean government has been pushing its conglomerates, or chaebol, to flatten their holding structure and be more shareholder-friendly. One way is through taxing. If the family controls more than 30% of a company and over 15% of the company’s revenue is transactions within the conglomerate, then this family must pay extra taxes for these inter-company transactions. After the proposed share sale, the Chung family would have held 29.99% of Glovis.

The juicy bit is on succession. According to FinanceAsia, the son needs to sell his Glovis shares to pay for the hefty 50% inheritance tax:

The main problem centres on the very small stakes [Chung Eui-sun] owns in the group’s main listed entities. He owns 31.9% in Hyundai Glovis and 11.7% in unlisted Hyundai Engineering, but only 1.8% in Kia Motors, 0.0003% in Hyundai Motor and nothing in Hyundai Mobis.

By contrast, his father has multiple stakes in all of them including 11.51% in Hyundai Glovis, 11.84% in Hyundai Steel, 6.96% in Hyundai Mobis and 5.17% in Hyundai Motor. When he dies, Korea’s Centre for Good Corporate Governance calculates that Chung Eui-sun will need to source roughly Won3.5 trillion ($3.21 billion) to pay the country’s 50% wealth transfer tax and inherit the stakes.

The father is 76-year-old and the son is 44.

But more likely, the proposed block sale is about flattening corporate structure. If the family sells down their Glovis shares, it can use the proceeds to buy shares in Hyundai Mobis(012330.KS), eventually making the latter a holding company for the family shares. FinanceAsia again:

Analysts believe the next step would have been the purchase a 16.88% stake that Kia Motors holds in Hyundai Mobis, the key link in the group’s cross shareholding structure.

This sale would dismantle the cross shareholdings and effectively turn Hyundai Mobis into a holding company. It would then own 20.78% of Hyundai Motor, which in turn owns 33.86% of Kia Motor.

Shares of Hyundai Mobis jumped 11.1% after the failed sale. Hyundai Motor (005380.KS) gained 1.4%. The KOSPI Index was down 0.2%. Overnight, the iShares MSCI South Kore Capped ETF (EWY) was little changed.

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