One of South Korea’s top 10 conglomerates faces investor outrage over a proposed $ 3 billion merger of two retail units of foreign and minority shareholders who say the deal unfairly favors the founding family of the group.
Investors say the proposed merger by GS Group eliminates minority shareholders. This is the latest sign, they say, that the efforts of President Moon Jae-in’s administration to reforming sprawling family groups fail despite rising investor activism in the country.
GS Group is South Korea’s eighth-largest conglomerate in terms of assets and one of the country’s oldest family groups, known as chaebol. It’s an offshoot of the family behind the LG Group, with 66.8 billion won ($ 60 billion) in assets and interests ranging from retail to energy and construction.
In November, it announced a plan to combine GS Retail with GS Shop, its door-to-door sales subsidiary, in July 2021 to strengthen their retail business in the face of stiff domestic competition.
But the group’s proposed merger ratio of 4.22 GS Retail shares to one GS Shop share has angered investors. The situation evoked the contentious bondage of the two units that Samsung crossed over in 2015 after taking on a militant challenge, and the Hyundai Motor Group restructuring plan three years ago which was shelved due to strong opposition from shareholders.
Investors also bristled over LG Corp’s restructuring plan. US activist hedge fund Whitebox Advisors last month launched a campaign to end the split of multiple affiliates that she said was aimed at helping a founding family member start their own business rather than creating shareholder value.
Minority shareholders of GS Shop say the merger ratio understates the nation’s largest home-based sales network, which averages over 100 billion won in annual net profit and about 600 billion won in cash and cash equivalents.
“The merger is similar in nature to the Samsung case as the merger ratio favors the controlling family and does not properly reflect the value of the company,” said Albert Yong, managing partner of local hedge fund Petra Capital Management. “Opaque agreements that benefit large shareholders at the expense of minority shareholders are still in progress.”
The companies say the ratio was decided in accordance with current South Korean regulations.
The founding Huh family owns more than half of GS Holdings, which controls 66% of GS Retail and 36% of GS Shop. GS Retail operates a chain of convenience stores, supermarkets and hotels in South Korea, while GS Shop has approximately 18 million customers.
“GS Shop was significantly undervalued, despite its substantial asset value,” said a US hedge fund manager with investments in the country.
But analysts say investors face an uphill battle to block the deal at a shareholder meeting scheduled for May.
Foreign investors hold 26% of GS Shop, less than the group’s holding company. The state-run National Pension Service, which has a 5 percent stake, said it would vote on the deal in accordance with its management code, which underlines the importance of its fiduciary duty.
“The deal with GS is likely to gain shareholder approval without too much trouble,” the US hedge fund manager said. “It is simply disappointing to see the interests of minority shareholders continue to be ignored in the country.”