(Bloomberg) -- Elliott Management Corp., the activist fund headed by billionaire Paul Singer, escalated pressure on Hyundai Motor Group by saying the conglomerate’s planned 10.6 trillion won ($9.9 billion) merger of two units shortchanges some shareholders and lacks business logic.
Instead of spinning off divisions of a group supplier and merging them with its logistics firm, the U.S. fund proposed that Hyundai Motor Co. merge with parts maker Hyundai Mobis Co. to form a holding company that would oversee the group. In a presentation, Elliott also said group units should return more than 12 trillion South Korean won in excess cash to shareholders, raise dividends, and cancel treasury shares. And the investor called for the companies to add new independent directors to each of their boards to improve governance.
“With Korea’s recent movement towards becoming a more transparent, open and investor-friendly jurisdiction, we believe that these proposals come at an opportune time for Hyundai Motor Group management to demonstrate its willingness to listen to shareholders’ demand for more equitable treatment,” Elliott said in a letter to company’s board Monday.
The New York hedge fund said combining Hyundai Motor and Hyundai Mobis would create the seventh-largest automotive company in the world by assets. Elliott said it would also provide “a significant margin uplift, and will bring further stability to the combined businesses’ profitability and catalyze a re-valuation by the market.”
The demands signal a looming battle between one of the world’s most tenacious activist investors and Korea’s second-largest business empire. For Hyundai’s founding family, Singer’s investment comes at a particularly tricky time as the 80-year-old patriarch, Chung Mong-koo, prepares to hand over control of the conglomerate to his son.
“This is the start of a campaign to oppose Hyundai’s plan,” said Kim Joon-sung, an analyst at Meritz Securities Co. in Seoul. “The restructuring plan is an urgent issue for Hyundai.”
In a statement, Hyundai Motor Group said it will “continuously communicate with shareholders and investors around the world including Elliott Management to explain the underlying goal and needs of the proposed restructuring plan.”
Return to Korea
Elliott’s acquisition of more than $1 billion in stakes of three group units -- Hyundai Motor, Kia Motors Corp. and Mobis -- was revealed this month, marking its return to Korea. The firm said Monday it held more than 1.5 percent of the common stock in each of the companies.
Hyundai Motor shares gained as much as 3.1 percent as of 9:10 a.m. in Seoul trading. Kia advanced 1.3 percent, while Mobis rose 2.7 percent.
Three years ago, Singer launched a campaign for reforms at the nation’s biggest conglomerate, Samsung Group, and narrowly lost in a proxy fight, while still playing a key role in events that led to the impeachment of the country’s president and the jailing of Samsung’s de-facto leader.
Outside of Korea, Singer is well known for his legal tussles with Argentina after he sued the country for its 2001 default on $95 billion of debt. He has also targeted the world’s biggest mining company BHP Billiton Ltd., taken on Warren Buffett in a battle for Texas’s largest electricity distributor, and recently launched a proxy fight at Telecom Italia to wrest control of the company’s board from Vivendi SA.
Late last month, Hyundai Motor Group unveiled a reorganization plan billed as an effort to streamline its complex ownership structure, including the proposed multi-billion-dollar merger of part of Mobis’s business with affiliate Hyundai Glovis Co. An adviser to the group said this month it plans to unveil changes to the plan to enhance shareholder value.
Read more: Singer throws wrench at Hyundai hopes for smooth succession
Elliott argues Hyundai’s plans are inefficient, lacks business logic and undervalues Mobis’s spun-off business. The units represent 54 percent of pretax income last year, but the implied valuation is only 37 percent of the pre-announcement value of Mobis, according to the hedge fund. The group also failed to address the need to improve shareholder returns and governance, the investor said.
Calls for Cash
A merger between Hyundai Motor and Mobis would result in a more efficient structure, Elliott said. The fund also criticized Kia’s plan to sell its shares in affiliate Mobis to the founding family as lacking “a transparent process to realize fair value” and wants the company to detail how that transaction will be carried out.
Elliott called for Hyundai Motor and Mobis to reduce a combined 12 trillion won in excess cash either through a buyback or dividend.
Hyundai Motor, Kia and Mobis’s all-Korean boards should also elect independent directors to improve its governance, Elliott said.
“We find that there is still considerable progress to be made to reach global standards, especially in regards to its board composition and transparency, which lack diversity and non-executive directors’ relevant industry experience outside of Korea,” the firm said.
Maryann Keller, an independent auto analyst in Stamford, Connecticut, said while Elliott’s demands are traditional by American standards, it’s unclear how they’ll fit in a Korean environment.
“Korean companies focus on what’s best for the business, and that’s not always what’s best for shareholders,” she said. “Just like in Japan, there’s been very little success in changing the behavior of Korean companies to mold them into the American model.”
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