US financier Carl Icahn’s audacious move on Korean tobacco and ginseng company KT&G has made great headlines and triggered apoplexy among Korea’s more xenophobic elements. Having amassed a combined stake of 6.72% with fellow investor Steel Partners, and pressed for a spin-off of KT&G’s ginseng division to return more capital to shareholders, Icahn has even mooted a takeover of the company. In March the Icahn camp finally won a board seat in a shareholder vote, the first time a foreign investor has been voted onto a Korean board against management wishes.
It might seem that Icahn has a clear case to make and is successfully prosecuting it. Korea is well known for its market “discount” – an ill-defined concept that penalizes local valuations when set against international comparables as a result of a vague list of issues that include weak corporate governance, government protectionist policies and even perceived North Korean risk.
But Icahn might have chosen the wrong target. A company that is widely respected in Korea and internationally for sound corporate governance is not the obvious target for an overhaul. And KT&G has already returned large sums to shareholders via increased dividends and buy-back programmes.
Greenmail
So what is really going on? According to one banker familiar with the situation, it’s little more than old-fashioned Wall Street tactics. “I think their original intention was greenmail,” he says. “Get in and get out as quickly as possible. If ever there was the possibility of a hostile foreign takeover of this business – if anyone thought this company was really going to change hands – there’d be a Korean solution to this very fast.”
This means that the market does not believe that Icahn and Steel Partners are for real. “They’ve come out with a wishy-washy intent to go ahead with a tender offer,” he says. “There’s been no documentation backing up that intent and a lot of public statements that haven’t been backed up either.”
According to Korean regulations, anyone wishing to launch a takeover of a Korean company must first deposit the full amount of the potential proceeds with a Korean financial institution. That is a big ask even for the likes of Icahn and there is no evidence that funds will be forthcoming.
The presence of Steel Partners in the Icahn camp is also instructive. In 2004 Steel took stakes in two undervalued Japanese companies and launched tender offers for them. Although the offers failed, the aggressive tactics forced management to return surplus capital to shareholders, making Steel handsome profits in the process. That was, of course, the whole point in the first place. “The last thing that Steel Partners would ever want is to control these companies,” says an activist funds expert in New York. “They would not know what to do with a company if they ever won a bid.”
Although the tactics employed in the Icahn camp seem clear, they might not work this time, according to one banker. “They’re in a bit of a dilemma now, with this one board seat,” he says. “It’s going to make it more difficult for them to exit: the Korean securities code won’t allow them to drop their investment so easily. They’re insiders now: that sort of perpetuates the situation.”
So Icahn and Steel Partners might find themselves in a much longer and tougher battle than they imagined. To make matters worse, there is little chance of their finding help. “What are they going to do now?” asks one M&A banker at a bulge-bracket firm, “I don’t think anyone will help them. There’s a paranoia about getting entangled in hostile situations in Korea.”
That’s ironic, since Icahn and company would probably have paid handsomely for that advice before becoming entangled themselves.
