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Korea Zinc has repurchased 9.85% of its shares in a $1.5 billion buyback to counter a potential takeover by top investor Young Poong and MBK Partners

In a move to counteract a potential takeover by its top investor Young Poong and private equity firm MBK Partners, Korea Zinc (010130.KS), the world’s largest zinc smelter, announced on Monday that it has repurchased 9.85% of its shares in a $1.5 billion buyback initiative. This significant transaction aims to secure control of the company, as Korea Zinc's leadership, backed by Bain Capital, seeks to prevent shareholders from selling their stakes to Young Poong and MBK.

This high-stakes showdown between Korea Zinc’s Choi family and the Chang family of Young Poong has intensified as both sides vie for dominance over the $18 billion zinc empire. Bain Capital, a supporter of the Choi family, separately secured a 1.41% stake in the company, according to a regulatory filing by Korea Zinc. However, the combined strength of Korea Zinc’s management, backed by shareholder alliances, still trails the substantial influence of MBK and Young Poong, setting the stage for a prolonged and potentially tumultuous takeover battle.

Buyback Strategy and Market Reaction

Korea Zinc’s decision to buy back 9.85% of its shares has not only showcased its commitment to retaining control but has also driven its stock prices to new record highs. The company spent 2.07 trillion won ($1.5 billion) on the buyback, aiming to support shareholder value by reducing the total number of available shares in circulation. This buyback comes with the intention to eventually cancel the newly acquired shares, a move designed to increase the relative value for existing shareholders.

Despite this tactical buyback, the company clarified that the cancellation of these shares will not result in an increase in the Choi family's stake relative to its competitors, specifically MBK and Young Poong. Neither side currently holds a majority stake, setting the stage for an intense proxy fight should the battle escalate to a shareholder vote.

Korea Zinc's share price surged as much as 11.7% on Monday, reaching 1.4 million won, a significant increase from the buyback price of 890,000 won. It closed up 3.8% at a record high, fueled by growing investor anticipation around the shrinking availability of shares due to tender offers from both sides. These soaring stock prices have prompted the Korea Exchange to issue a warning, stating that further steep rises could lead to a halt in Korea Zinc’s trading activity, should specific criteria be met.

Background of the Power Struggle

The power struggle within Korea Zinc has been ongoing for some time, as the Choi family, which currently leads the company, faces a direct challenge from Young Poong’s Chang family. The rivalry reached a new level in September when Young Poong joined forces with MBK Partners, a leading private equity firm, in a joint offer to consolidate control over Korea Zinc.

MBK and Young Poong currently hold approximately 38.5% of Korea Zinc’s shares. Before the buyback, Korea Zinc's management, spearheaded by the Choi family, reportedly had the support of shareholders representing up to 36% of the company. This included backing from prominent South Korean firms such as Hyundai Motor Group, which is viewed as a key strategic ally. However, these figures underscore a narrow margin, suggesting that neither side has a clear upper hand, thereby heightening the stakes of the corporate showdown.

MBK's Countermeasures and Governance Push

In response to Korea Zinc’s buyback efforts, MBK Partners has made a bold move to influence the company’s governance structure. On Monday, MBK announced the nomination of 14 new directors to Korea Zinc’s board, a clear signal of its intent to reshape the company’s leadership. This proposal comes in the context of Korea Zinc’s current board, which consists of 13 members. By adding new members, MBK could potentially shift the balance of decision-making power in its favor, provided its nominations are approved.

In addition, MBK has called for an extraordinary shareholder meeting, pushing for a proposal to implement a system that would separate management from the board. This measure is part of a broader plan to improve corporate governance within Korea Zinc. MBK has argued that the latest share buyback by Korea Zinc resulted in a substantial financial strain on the company, a viewpoint intended to sway shareholders who might be concerned about the long-term impact of such aggressive tactics on the firm’s fiscal health.

The Role of Strategic Shareholders and the National Pension Service

Several significant Korean conglomerates, including Hyundai Motor, Hanwha Group, and LG Chem, are perceived as sympathetic to the Choi family’s leadership. However, none of these companies have publicly declared their stance amid the intensifying dispute. Their allegiance, whether public or silent, could play a critical role in determining the outcome of this control battle, particularly if a proxy war unfolds.

One of the most critical players in this high-stakes situation is South Korea’s National Pension Service (NPS). As the third-largest pension fund globally, the NPS held a 7.83% stake in Korea Zinc as of June. Given its significant stake, the NPS’s position on the matter is likely to be influential. As of now, the NPS has not disclosed its stance, but its eventual decision could serve as a decisive factor in determining the control dynamics within Korea Zinc.

The NPS has historically prioritized corporate governance reforms and sustainability in its investment strategies, which aligns with MBK’s recent push for a governance overhaul within Korea Zinc. This alignment could potentially influence the NPS to support MBK and Young Poong in the upcoming shareholder deliberations. However, this remains speculative until the NPS formally declares its position.

Strategic Implications for Korea Zinc and Industry Impact

The battle for control of Korea Zinc reflects broader industry trends, where prominent players in the resources sector seek to secure strategic assets amid fluctuating global demand and supply dynamics. As one of the largest zinc producers globally, Korea Zinc is a vital player in the metal industry, which is crucial for sectors such as construction, automotive, and technology. The outcome of this internal struggle could have implications for the supply chain dynamics and pricing of zinc on a global scale.

If MBK and Young Poong succeed in gaining control, Korea Zinc may witness significant changes in its operational and strategic priorities. The proposed governance changes and potential management separation could lead to a reshaping of Korea Zinc’s business approach, possibly favoring enhanced operational transparency and shareholder value. On the other hand, if the Choi family retains control, Korea Zinc may continue on its current trajectory, with support from key Korean conglomerates bolstering its existing leadership structure.

Outlook and Potential Developments

Looking ahead, Korea Zinc’s future remains uncertain as the tug-of-war between its top stakeholders unfolds. The high level of strategic manoeuvring by both the Choi family and MBK-Young Poong suggests that this dispute could last well into the foreseeable future. If the Choi family continues to consolidate support from other prominent Korean shareholders, it may be able to maintain control without ceding power to MBK.

For investors, the evolving dynamics at Korea Zinc highlight both opportunities and risks. The company’s shares have seen record highs as the takeover battle has fueled interest and demand. However, the potential for market volatility remains significant, especially if trading activity is halted by the Korea Exchange or if there is an unexpected shift in support from major shareholders like the NPS.

The coming months will likely bring further twists as both sides deploy strategic moves to tilt the balance of power. As Korea Zinc’s shareholders await more clarity, the ultimate control of this $18 billion zinc giant will rest on a complex interplay of alliances, strategic buybacks, and shareholder votes.