A $580 Billion Fund's Dilemma: Fight Elliott or Betray Country

(Bloomberg) -- The last time South Korea’s $580 billion National Pension Service voted against billionaire Paul Singer, it helped trigger a sequence of events that ended with the imprisonment of the fund’s chairman and the impeachment of the nation’s president.

Now comes the sequel, this time featuring Singer’s campaign to invoke significant changes at Hyundai Motor Group, the world’s fifth-largest automaker. His activist fund, Elliott Management Corp., is challenging Hyundai’s $8.8 billion merger plan between two units, saying it shortchanges some shareholders and lacks business logic.

The state-controlled NPS is at the center of this fight because of its combined $2.7 billion in holdings in the pair of Hyundai units -- parts maker Hyundai Mobis Co. and logistics provider Hyundai Glovis Co. The world’s third-biggest sovereign pension fund is in a bind because the family-run conglomerate needs its support to complete the proposed merger, but new President Moon Jae-in’s administration now runs the NPS and he vowed to curb the influence that Korea’s business elite holds over the country.

“If I were the NPS, I would abstain from voting,’’ said Chang Park, an economics professor at Chung-Ang University in Seoul. “If the fund votes against Hyundai, local media would criticize it by saying it hates the chaebol. If it votes for Hyundai, local media would also criticize it for driving away foreign capital.’’

Hyundai wants to push the deal in an effort to streamline its complex ownership structure as the founding Chung family prepares for a generational leadership transition at the second-largest among Korea’s family-run conglomerates, known locally as the chaebol, after Samsung Group.

Read more: Bloomberg’s interview with Hyundai’s crown prince

Hyundai’s businesses, including cars, steel and construction, have scores of companies with total assets exceeding $200 billion.

Euisun Chung, Hyundai’s vice chairman, and his family can hardly afford to lose the NPS’s backing. The deal requires support from at least two-thirds of shareholders voting at a scheduled meeting May 29, and foreign investors last month held nearly half of Hyundai Mobis, according to data from the Korea Exchange.

One of those foreign shareholders is Singer’s New York-based hedge fund, which owns stakes of more than 1.5 percent each in Hyundai Mobis, Hyundai Motor Co. and Kia Motors Corp. The combined value of those shareholdings was more than $1 billion.

Elliott suggests instead that Hyundai Motor Co. merge with Hyundai Mobis to form a holding company that would oversee the group. Elliott also said group units should return more than 12 trillion won ($11 billion) in excess cash to shareholders, raise dividends, and cancel treasury shares. The investor also called for the companies to add new independent directors to each of their boards to improve governance.

Two of the world’s most influential proxy advisory firms, Glass Lewis & Co. and Institutional Shareholder Services Inc., agreed with Elliott that the proposed deal was unfavorable to Hyundai Mobis shareholders. Glass Lewis went as far as calling the deal "profoundly unattractive’’ this week.

It’s not just foreigners. Sustinvest, a South Korean firm that evaluates corporate actions, said this month the planned merger doesn’t serve the interests of stakeholders, according to Yonhap.

“As a shareholder, it is a difficult plan,’’ said Andrew Foster, chief investment officer at Seafarer Capital Partners in Larkspur, California. Seafarer Capital holds about $200 million, or 0.9 percent, of Hyundai Mobis shares, according to data compiled by Bloomberg.

“The strategic rationale that has been discussed is not compelling yet," Foster said. "Also, the financial implications of the proposal are negative.’’

Count Truston Asset Management, which holds small stakes in both Mobis and Glovis, among local fund managers defending Hyundai. The asset manager will vote in favor of the Hyundai plan, said Lee Sung-won, who heads the stewardship code committee at Truston. The Seoul-based fund concluded it couldn’t find a better plan to resolve the circular shareholding issue, Lee said.

As to the government, the highest-ranking official to weigh in on the looming proxy fight is Kim Sang-jo, a one-time shareholder activist who now runs the Fair Trade Commission that oversees conglomerates. He said Elliott’s proposal is unreasonable and would violate a ban on non-financial holding companies owning financial affiliates, according to an FTC spokesman.

Caught in the middle is the NPS, which owns 9.8 percent of Hyundai Mobis and 11 percent of Hyundai Glovis, according to data compiled by Bloomberg.

The NPS will ask an outside committee to decide next week on whether the fund should vote for the deal or not, Yonhap News Agency reported. Nothing has been decided on the matter, said Chi Young Hye, an NPS spokeswoman.

When Singer opposed a 2015 reorganization plan by national champion Samsung, the deciding vote in favor of the conglomerate was cast by the NPS. The then-chairman of the fund eventually was jailed for his role pressuring the fund to support the deal.

That conviction was part of a cascading influence-peddling scandal that sent Samsung Group heir apparent Jay Y. Lee and former President Park Geun-hye to prison. Lee has since been freed after his sentence was suspended.

Reforming the NPS is high on the economic agenda of Park’s successor, Moon. Yet hurdles remain: The NPS hasn’t filled a vacancy for chief investment officer, and it hasn’t adopted a proposed stewardship code of non-binding principles meant to promote transparency and accountability.

“If you are going to turn it into more of a professional pension fund that’s detached from politics and serves as an activist shareholder at times, this is something that will be a process,’’ said Troy Stangarone, senior director of congressional affairs and trade at Washington-based Korea Economic Institute of America.

©2018 Bloomberg L.P.

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