As Elliott Management has been reported to have urged the Hyundai Motor Group to establish a holding company through a merger between Hyundai Motor Company and Hyundai Mobis, much attention is being paid to what will be the activist hedge fund’s next move.
According to industry sources, the Hyundai Motor Group is not going to give any thought to the demand. Also, the group is unlikely to accept the hedge fund’s additional demands such as treasury stock retirement, dividend payout ratio adjustment and board reorganization.
This means the group will face the fund or placate it with money. Elliott Management is likely to go for a deal after bothering the group and its owners as much as possible if its demands are not accepted.
On April 4, Elliott Management announced that its shares in Hyundai Mobis, Hyundai Motor Company and Kia Motors exceeded US$1 billion. If the fund significantly increased its shares in Hyundai Mobis until April 12, when the company’s list of shareholders was finalized, it can vote at the company’s shareholders meeting on May 29 against a merger between Hyundai Mobis and Hyundai Glovis and the former’s transfer of its module and after-sales parts businesses to the latter. These require votes in favor from at least two-thirds of participating shareholders and consent equivalent to at least one-third of the total number of shares. At present, the largest shareholders and affiliated persons own 30.2% of Hyundai Mobis while the shareholding of foreigners amounts to 48.32%. This means the competition can be fierce if the foreign shareholders choose to side with Elliott.
“A lot of shareholders are discontent with the ratio of merger between the two companies whereas not a single one of Elliott’s demands is disadvantageous to them,” said a stock market analyst, adding, “Elliott’s power can be stronger than expected.”
Under the circumstances, foreigners are continuing to buy Hyundai Motor Company shares. This implies they can make a move at the shareholders meeting with regard to the merger between Hyundai Mobis and Hyundai Glovis. This month alone, they bought 1.09 million Hyundai Motor Company shares, raising their shareholding in the company to a record high of 46.5%. The ratio was 42% in August 2016.
Meanwhile, foreign investors have sold Hyundai Mobis shares since Elliott’s move. The total selling amount since April 11 is approximately 460,000 shares. According to market analysts, they are doing so based on an analysis that the enterprise value of Hyundai Mobis may be partially impaired after the division. This month, the Capital Group announced that it raised its shareholding in Hyundai Motor Company by 0.07 percentage points to 7.4%. Now, the Capital Group is the third-largest shareholder in the company behind Hyundai Mobis and the National Pension Service, which own 20.78% and 8.44% of the company, respectively. In other words, the Capital Group is increasingly threatening the influence of the Hyundai Motor Group owners including Chairman Chung Mong-koo, who owns 5.17%. Furthermore, the Capital Group owns 4.86% of Hyundai Mobis. Although its name is not found in the shareholder disclosure of Hyundai Mobis as the shareholding is less than 5%, it is regarded as the fifth-largest shareholder in the company behind Kia Motors (16.88%), the National Pension Service (9.82%), the chairman (6.96%) and Hyundai Steel (5.66%). Founded in L.A. in 1931, the total assets the Capital Group manages amount to 1,700 trillion won a year. It demanded listing of Samsung Electronics on the U.S. stock market back in 2004 as a third-largest shareholder. In this regard, the asset management firm is regarded as an activist hedge fund like Elliott Management.
Elliott may take profits and step out before the shareholders meeting as the case may be. Any signal implying additional purchase of Hyundai Mobis shares by Elliott can result in a significant rise in stock price through individual investor attraction. The chairman and his son can easily remove cross shareholding and introduce a controlling company structure led by Hyundai Mobis when the Hyundai Glovis is higher in stock price than Hyundai Mobis. Therefore, if the Hyundai Mobis stock price rises too much, Elliott may propose a block deal so the chairman and his son buy its shares at a high price or take profits by selling the shares in the market.
Still, some point out that Elliott’s demand for the holding company is impractical because it is a violation of banking-commerce separation and its move will fail in the end. What it is demanding is a merger between Hyundai Motor Company and Hyundai Mobis followed by division of Hyundai Motor Company into holding and operating companies so the holding company controls the operating company and the operating company controls financial subsidiaries such as Hyundai Capital and Hyundai Card. This, however, violates banking-commerce separation, which means no non-financial holding company can have a financial subsidiary. This is why some in the industry point out that Elliott’s demand is nothing but a negotiation tool for short-term profits unlikely to win the consent of shareholders.