Through Equity Spinoff
A rumor that Hyundai Motor Group, which is considered South Korea’s number two business group after Samsung, is working to convert to the holding company structure is emerging again. This has come after Korea Fair Trade Commission (KFTC) Chairman Kim Sang-jo said during his interview with a foreign media on August 21 that he has been in talks with Hyundai Motor Group to revamp its complex governance structure including resolving cross shareholding ties.
At a press conference in May, Kim also said, “Hyundai Motor Group is the only conglomerate where cross shareholding plays a key role in family control and succession.” Aside from Kim’s remarks, the business and securities industries have been most interested in Hyundai Motor Group’s governance structure reform for a long time. This is because Hyundai Motor Group has made the least progress in governance structure reform among the nation’s top five conglomerates. As President Moon Jae-in pledged to reform the country's family-owned conglomerates, known as chaebols, such as removal of cross shareholding ties, separation of industrial and financial capital and regulations on funneling work to subsidiaries, Hyundai Motor has no choice but to reform its corporate governance structure.
The most commonly identified problem related to domestic conglomerates’ corporate governance is cross shareholding distorts ownership structures and enables family members to take advantage of the structure with small stakes to support struggling affiliates by funneling business. Hyundai Motor Group is no exception. Hyundai Motor Group’s circular structure starts from auto parts maker Hyundai Mobis, which owns 20.8 percent shares of Hyundai Motor. Hyundai Motor has a 33.8 percent stake in its sister affiliate Kia Motors, which holds 16.88 percent shares of Hyundai Mobis to complete the circle. Under this structure, Chairman Chung Mong-koo can control all the affiliates, with a 5.2 percent in Hyundai Motor and a 6.96 percent in Hyundai Mobis. Hyundai Motor Vice Chairman Chung Eui-sun, who will succeed the management rights of the group, has been continuously purchasing stocks of major affiliates, but he only holds a 2.28 stake in Hyundai Motor and a 1.7 percent stake in Kia Motors. He doesn’t own a share in Hyundai Mobis which is the core of the cross shareholding structure.
Like other conglomerates, a stable succession of management rights is a top priority for Hyundai Motor Group in the process of corporate governance reform including removal of cross shareholding links. The simplest way to succeed the management rights for Vice Chairman Chung under the present situation is to buy Kia Motors’ stake in Hyundai Mobis. When he has control over Hyundai Mobis, he will be able to control both Hyundai Motor and Kia Motors and resolve new cross shareholding ties, which have been banned since 2014, at the same time. The problem is huge costs to take over Hyundai Mobis’ shares. Based on the closing price of 252,000 won (US$222) on the 21st, it will take more than 4 trillion won (US$3.53 billion) to acquire a 16.88 stake in Hyundai Mobis. In addition, the majority of market experts say that Vice Chairman Chung’s acquisition of Hyundai Mobis’ shares is not a “textbook answer” as the revised Fair Trading Act that requires to remove all the existing cross shareholding ties is on motion at the National Assembly.
For these reasons, the business and securities industries have steadily expected that Hyundai Motor Group will seek to convert to a holding company structure. They say the most likely scenario for the creation of a holding company is to split Hyundai Motor, Kia Motors and Hyundai Mobis into investment and business divisions, with the goal of combining three investment divisions to form a holding company. In this way, Vice Chairman Chung can succeed the management rights by acquiring the stake in the holding company while eliminating cross shareholdings. However, this also can cause another problem – cross investment. It can remove existing cross shareholdings but new holding company and cross investment will be created in the spin-off since Kia Motors is the largest shareholder of Hyundai Steel, the second largest shareholder of Hyundai Mobis. Under the current regulations on new cross shareholdings, conglomerates are banned from creating new cross shareholding links and strengthening existing cross shareholdings.
Some say family members can use their own money to purchase major affiliates’ shares when Hyundai Motor Group have difficulties in converting to the holding company structure. Vice Chairman Chung can succeed the management rights by selling his 23.3 stake in Hyundai Glovis and 11.7 percent stake in Hyundai Engineering and buying the stake in Hyundai Mobis. However, there is a variable – the expansion of regulations on funneling business to affiliates. The Moon Jae-in administration seeks to lower the requirement of listed companies’ ownership ratio to be sanctioned from the current 30 percent to 20 percent in order to eradicate family members’ unfair funneling business to affiliates. When the relevant law passes the National Assembly, Vice Chairman Chung needs to reduce his 23.29 percent stake in Hyundai Glovis, which accounts for nearly 70 percent of inside business.
An official from the business industry said, “Hyundai Motor Group is still highly likely to convert to a holding company. However, it will take time as there are a lot of problems to be solved. Since the removal of cross shareholding links and improvement of corporate governance structure cannot be solved overnight, the government including the KFTC, should take time to encourage conglomerates to improve the structure.”