Under pressure from U.S. activist hedge fund Elliott Management, Hyundai Motor Group is expected to propose a stronger shareholder friendly policy and announce its new governance reform plan.
The group scrapped its governance reform scheme last year due to opposition from institutional shareholders, including Elliott Management. Industry watchers expect the group will present a more shareholder friendly governance plan this time.
Hyundai Motor Co. executive vice chairman Chung Eui-sun will be confirmed as chief executive officer (CEO) of Hyundai Motor Co. and Hyundai Mobis at the board meetings of the two companies to be held after the general shareholders meetings on March 22. Before the board meetings, Hyundai Motor Group presented a stronger shareholder friendly policy to respond to Elliott's call for higher dividend payouts.
Previously, Hyundai Mobis announced a 2.60 trillion won (US$2.31 billion) shareholder return package over the next three years in response to Elliott’s demand for special dividend payouts worth 2.50 trillion won (US$2.22 billion). Hyundai Motor presented its medium and long-term performance improvement guidance, pledging to attain an operating margin of 7 percent and return on equity (ROE) of 9 percent by 2020.
When Chung is elected as CEO, the group is forecast to come up with its new governance reform plan which can receive approval from shareholders. The IB industry believes that Hyundai Motor Group will unveil its governance reform plan by the end of next month. The new plan, like the earlier one, is expected to put Hyundai Mobis at the top of the governance structure and use Hyundai Glovis as a key unit in an organizational overhaul.
If Hyundai Motor Group’s performance improves quickly in the first half of the year, Chung may aggressively increase his stakes in core businesses. In this case, Chung can fully receive his dividends and sell off his stake in Hyundai Glovis, a subsidiary that was named by the Fair Trade Commission as a tool for intra-group unfair trading.
Chung may attempt to partially revise last year's governance reform plan. He may push for a merger between spun-off units of Hyundai Mobis and Hyundai Glovis and address the complaints of Hyundai Mobis shareholders by changing the merger ratio. He can become the largest shareholder of the remaining Hyundai Mobis by exchanging his stake in merged Hyundai Glovis with the stake in Hyundai Mobis owned by Kia Motors. He can acquire the 7 percent stake held by chairman Chung Mong-koo through inheritance and the 5.7 percent owned by Hyundai Steel through purchase. In this case, however, he needs a new logic to justify the change in the merger ratio. Chung’s stake in Hyundai Mobis can also be reduced.
There is another option for the governance reform plan. The group can put Hyundai Glovis at the top of the governance structure. In this case, the group can split Hyundai Mobis and have Hyundai Glovis acquire the stake in the remaining Hyundai Mobis held by Kia Motors. Chung can secure enough stakes to directly and indirectly control the group and convert the indirect stake into the direct stake through the merger between the two companies in the future.
Some experts say that the group is least likely to reform its governance structure through the spin-off of business divisions with the announcement of Hyundai Mobis’ shareholder value improvement plan. Lee Jae-il, an analyst at Eugene Investment & Securities, said, “Since it confirmed a large-scale capital investment, it cannot reduce Hyundai Mobis’ capital and worsen its cash flow of operation. The practical alternative plan at this stage can be the settlement of the cross-shareholding structure by the major shareholder’s purchase of the stake in Hyundai Mobis owned by Kia Motors.
Hyundai Motor Group announced its plan to spin off Hyundai Mobis’ module and after-sales business and merge it with Hyundai Glovisin April last year. However, it withdrew the plan after Elliott said the 0.71:1 merger ratio between Hyundai Mobis and Hyundai Glovis would undervalue Mobis shares and is unfair to its shareholders.
Hyundai Motor Group has four cross-shareholding structures between Hyundai Mobis, Hyundai Motor, Kia Motors and Hyundai Mobis. Chung does not have the stake in Hyundai Mobis, which is at the top of the governance structure, so the core of the governance reform plan is to strengthen the control of affiliates through Hyundai Mobis in the future.