Hyundai succession stalls as Glovis block falters

The long-anticipated handover from father to son at Korea's second largest Chaebol has failed to move up a gear after share sale is cancelled.
Chung Mong-koo
Chung Mong-koo

The heir apparent and current chairman of Korea's second biggest Chaebol failed to sell shares in Hyundai Glovis on Monday night in a move that should have paved the way for the succession of father to son. 

Chung Eui-sun and his father Chung Mong-koo hoped to raise up to $1.25 billion by offloading a combined 13.4% stake in Hyundai Glovis, the group's logistics and shipping arm.

Chung junior hoped to sell 3.22 million shares, reducing his stake from 31.9% to 23.7%, while Chung senior hoped to sell 1.8 million shares.

The 5.02 million share deal was pitched on a price range spanning Won264,000 to Won277,500 per share, equating to a discount of 7.5% to 12%. While the discount was large, the deal was enormous relative to the company's current average daily trading volume of 75,719 shares and investors baulked.

Shortly prior to the Korean open, sources close to the deal told FinanceAsia that the Citigroup-led sale had failed. The failure is also not very surprising given the share price's extremely strong run over the past 12 months, rising 34.5% compared to a 4% drop in the benchmark Kospi index over the same time period.

However, this had shown signs of flagging recently, with the share price down 2.8% year-to-date and 1.8% on Monday before the block trade was announced.

Throughout 2014, analysts forecasted strong share price performance in the knowledge that the Chung family wanted to maximise value in Hyundai Glovis ahead of a potential divestment. Whether this outperformance will pick up again may depend on where investors believe Hyundai Glovis will end up sitting in any future holding company structure.

Some have speculated that it will eventually be merged with auto parts manufacturer Hyundai Mobis if and when the latter becomes a holding company for the overall group.

Under South Korean president Park Geun-hye, the country's Chaebol have been under significant pressure to unwind their multiple cross-shareholdings and set up holding company structures to promote better governance and minimize inter-company transactions. This drive has also co-incided with succession issues involving the handover to the third generation from second-generation leaders such as Hyundai's Chung Mong-koo and Samsung's Lee Kun-hee. 

In Hyundai's case, the family will be hoping that Chung Eui-sun does not live up to the famous saying that the first generation makes it, the second generation enjoys it and the third generation blows it. To date, he has shown his management mettle by turning Kia Motor around after persuading Audi's chief designer Peter Schreyer to join.

The main problem centres on the very small stakes he owns in the group's main listed entities. He owns 31.9% in Hyundai Glovis and 11.7% in unlisted Hyundai Engineering, but only 1.8% in Kia Motors, 0.0003% in Hyundai Motor and nothing in Hyundai Mobis.

By contrast, his father has multiple stakes in all of them including 11.51% in Hyundai Glovis, 11.84% in Hyundai Steel, 6.96% in Hyundai Mobis and 5.17% in Hyundai Motor. When he dies, Korea's Centre for Good Corporate Governance calculates that Chung Eui-sun will need to source roughly Won3.5 trillion ($3.21 billion) to pay the country's 50% wealth transfer tax and inherit the stakes.

The attempted share sale may have marked an attempt to raise capital that could be used for just such an eventuality. However, analysts believe the next step would have been the purchase a 16.88% stake that Kia Motors holds in Hyundai Mobis, the key link in the group's cross shareholding structure.

This sale would dismantle the cross shareholdings and effectively turn Hyundai Mobis into a holding company. It would then own 20.78% of Hyundai Motor, which in turn owns 33.86% of Kia Motor.

The latter also owns a 19.78% stake in Hyundai Steel.

Analysts believe the Hyundai group and Chung Eui-sun will also try to raise further capital in 2015 through the IPO's of Hyundai Engineering and advertising company Innocean Worldwide in which Chung junior owns a 10% stake. Analysts believe the former will likely be valued with a market capitalization of about Won5.4 trillion ($4.95 billion) and the latter Won1.5 trillion ($1.4 billion).

Where Hyundai Glovis is concerned, analysts say the company needs to either ramp up its organic growth or step up its M&A activities if it wants to enjoy a positive re-rating.

Since it was listed in 2005, the group has tried to steadily diversify its client list away from Hyundai Group entities. Non-Hyundai clients now account for about 29% of overall revenues compared to 11% in 2012.

The company has also said it hopes to boost its fleet of car carriers from 49 at the beginning of 2014 to 100 by 2020. Likewise, it wants to boost its dry bulk carriers from 24 to 400 over the same period.

At Won300,000, Hyundai Glovis is currently trading on a 2015 p/e ratio of about 19.6 times earnings and 2016 p/e ratio of about 17.63 times. This places it at a significant premium to the Kospi 100 Index, which currently averages about 11.65 times forward earnings, but is in line with the shipping sector, which commands a much higher multiple of about 23.68 times.

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