As the Fair Trade Commission (FTC) is moving to increase the equity stakes that a holding company is required to own in its affiliates and grandson companies, conglomerate are looking for ways to adapt to the expected change in regulations.
According to investment banking (IB) industry sources on July 17, the special committee created for the revision of the Monopoly Regulation and Fair Trade Act is currently reviewing a plan to raise the stakes that a holding company is required to have in an affiliate and grandson company from the current 20 percent for a listed affiliate and 40 percent for an unlisted affiliate to 30% for a listed affiliate and 50 percent for an unlisted affiliate.
The commission is deliberating two approaches to implementing the strengthened regulation: applying it only to holding companies that are newly established or applying it to all holding companies with a long grace period.
According to Mirae Asset Daewoo Co., major holding companies that would have to increase their stakes in listed affiliates under the toughened regulation include SK Holdings Co., Lotte Holdings Co., Hanjin Kal Corp., Celltrion Holdings Co., Kolon Corp., Korea Kolmar Holdings Co., Dong-A Socio Holdings Co. and Chong Kun Dang Holdings Corp.
Currently, Celltrion Holdings holds a 20.1 percent stake in its main affiliate Celltrion, while Kolon owns a 20.4 percent stake in Kolon Life Science Inc. Korea Kolmar Holdings and Chong Kun Dang Holdings have only a 23.2 percent stake in Korea Kolmar and a 21.2 percent stake in and Chong Kun Dang, respectively. Hanjin Kal holds a 22.2 percent stake and a 29.6 percent stake in Hanjin Co. and Korean Air Lines Co., respectively.
In particular, SK Group is forecast to face a heavy burden under the revised rules. SK Holdings currently owns a 25.2 percent stake in its affiliate SK Telecom Co. and a 20.1 percent stake in its grandson firm SK Hynix Inc. It will have to raise the stakes by 4.8 percentage points and 9.9 percentage points, respectively. The cost to raise the stakes in the two companies is 919 billion won (US$815.08 million) for SK Telecom and 6.44 trillion won (US$5.71 billion) for SK Hynix based on their closing prices on July 13. In short, the group needs about 7.5 trillion won (US$6.65 billion) to meet the new regulation.
Jeong Dae-ro, an analyst at Mirae Asset Daewoo Co., said, “When the FTC strengthens the requirements of holding companies’ stock ownership, SK Group will be forced to purchase and cancel treasury stocks of SK Telecom and SK Hynix. It will be also forced to restructure its business portfolio by merging affiliates and selling off non-core units.”
Lotte Holdings will also need to increase its stakes in its affiliates. Lotte Group completed the stock exchange between Lotte Holdings and Lotte Chilsung Beverage Co. and Lotte Confectionery Co. last month. Accordingly, Lotte Holdings has increased its stake in Lotte Confectionery and Lotte Chilsung Beverage from 11.5 percent and 18.3 percent to 21.4 percent and 24.9 percent, respectively. Lotte Holdings holds a 22.1 percent stake in Lotte Food Co. as well. However, it will have to raise its stake to more than 30 percent when the new requirements are applied.
An official from the IB industry said, “Even when the requirements for stock ownership are strengthened, the FTC is expected to apply them to new holding firms or give enough grace period. So, the new regulations will be softer than feared. However, business groups will face more difficulty in maintaining the holding company system and expanding their businesses through M&As.”
Meanwhile, the FTC will hold a general meeting of the special committee for the revision of the Monopoly Regulation and Fair Trade Act this month to wrap up the ongoing review and submit its revision bill to the National Assembly in the second half of the year.