Governance Structure
Goldman Sachs added fuel to a controversy over the reorganization of Hyundai Motor Group’s governance structure. There have been rumors and speculation that Hyundai Motor Group, which has been slow to reorganize its governance structure compared to Samsung, is expected to start reorganizing the ownership structure as economic democratization has been under discussion and there have been some calling for settling risks of succession of management this year.
Under the circumstances, Goldman Sachs released a report that Hyundai Motor will become the ultimate holding company in the process of reorganization of Hyundai Motor Group’s governance structure in contrast to the consensus view. Accordingly, Hyundai Motor’s stock prices shot up on March 21. There was rumor that U.S. activist hedge fund Elliott Management, which attacked Samsung, bought a share in Hyundai Motor but it was found to be untrue.
Goldman Sachs released the report on the 20th that Hyundai Motor can be the holding company in the process of reorganizing Hyundai Motor Group’s ownership structure.
Hyundai Motor Group has a cross shareholding structure where Hyundai Mobis sits at the top because it owns a stake in Hyundai Motor, which in turn controls Kia Motors Co., who completes the cyclical ownership by owning a portion of Hyundai Mobis. Hyundai Group Chairman Chung Mong-koo has control over the group with his 5.2 percent stake in Hyundai Motor and 6.96 percent stake in Hyundai Mobis. Hyundai Mobis is the de fectro holding company which owns a 20.8 percent stake in Hyundai Motor. So, there had been the consensus view in the securities industry that Hyundai Mobis will be the center of the reorganization of the group’s ownership structure. There were speculations that Vice Chairman Chung Eui-sun would sell his 23.3 percent stake in Hyundai Glovis and 11.7 percent stake in Hyundai Engineering to buy shares in Hyundai Mobis. Due to the limits to resolve the cross shareholding structure, however, there are rumors lately that the holding company can change. There has been the market consensus that Hyundai Mobis will become the holding company even when Hyundai Motor, Kia Motors and Hyundai Mobis plan to build the holding company after spinning off their investment and business units and merging the investment sector.
However, Goldman Sachs presented an exceptional analysis that Hyundai Motor will turn into the core company in reorganizing the ownership structure instead of Hyundai Mobis. It pointed out Hyundai Motor as a strong candidate of the holding company considering the fact that Hyundai Motor has high incentives for dominant stockholders to become the holding company and is financially sound. In addition, Hyundai Motor has enough cash to increase dividends and it is the only company which receive brand royalties from other affiliates. In fact, Hyundai Motor announced on the 17th that it would receive 13.9 billion won (US$12.41 million) for group brand royalties from Hyundai Steel and Hyundai Glovis. Brand royalty is one of the main businesses of a holding company. Although the amount of brand royalties is not significant, it is meaningful itself.
Until now, the reorganization of Hyundai Motor Group’s governance structure has lied under the surface. Vice Chairman Chung has been buying the stake in Hyundai Motor from last year but he still has a low percentage of shareholding and there has been no mergers between affiliates after the merger between Hyundai Engineering and Hyundai Amco. But, the group can no longer postpone the reorganization of the governance structure because the bills, which can adversely affect the reform of conglomerates’ ownership structure such as the ban on cross-shareholding and restriction of voting rights on treasury stocks, are about to pass in the National Assembly. In particular, the fact that the lockup system of Hyundai Glovis whose largest shareholder is Vice Chairman Chung was lifted early February supported the reform of its ownership structure. This is because the largest shareholder has now secured a financial flexibility to implement the governance structure reshuffle.
Shin Seung-joon, head of the research division at Goldman Sachs Korea, said, “Chaebol reform will be a major issue in Korean society this year. Since the bill prohibiting cross-shareholdings is likely to pass in the National Assembly by the end of March or after the presidential election, conglomerates, including Hyundai Motor Group, will accelerate the reorganization of their ownership structures.” Meanwhile, regarding to the reform, Hyundai Motor said, “Chairman Chung is still well so there is no need to hurry the reform of the governance structure.”