Sovereign sells out of LG

After its exit from SK Corp, the fund surprises market with full Korean withdrawal.

Sovereign Asset Management, the private investment vehicle of New Zealand's Chandler brothers, has ended its two and a half year love-hate relationship with Korean equities. Yesterday it completed its sale of LG Group companies, LG Electronics and LG Corp - a move that follows its far more controversial exit from SK Corp.

Korea inc may well breathe a sigh of relief at this news, since Sovereign had proven to be a thorn in the side for the corporate sector. Sovereign did a good job of raising awareness of corporate governance and forced many positive changes, but it has to be said that its tactics were not an overwhelming success. (For more on the high profile battle with SK Corp see FinanceAsia magazine's March cover story). However, if Sovereign did not fully realize its objective (to remove SK Corp Chairman Chey Tae-won) it did realize a phenomenal return on its investment. In July it sold out of SK Corp at a profit of $762 million (ie $910,262 for every day it held the investment).

It has always been the view of this publication that Sovereign's investment in LG Electronics and LG Corp was part of the bigger battle with SK Corp. In January it invested in the two LG companies, and built stakes of around 7% in each. Unlike its aggressive strategy with SK, its approach to LG was polite and friendly - it commended the management and their corporate governance and said it had no desire to effect change. One way to interpret its investment in LG was as a diversionary tactic. Indeed, by virtue of being friendly towards LG, Sovereign was able to present itself as not being outright hostile to all Korean companies and hence try and win over local public opinion to its cause in the SK battle.

If this interpretation is correct, that would also explain Sovereign's swift exit from LG too. In the absence of its SK Corp stake, the LG investments were no longer strategic. What makes this interpretation all the more likely is the fact that there was apparently no rhyme or reason for Sovereign's timing of this latest sale.

SK epilogue

In fact, it did not exit with the same sort of healthy profit as its July liquidation of its almost 15% stake in SK Corp. In this case, it bought LG Electronics (LGE) in price ranges between W64,312 and W80,220 and sold at W62,000; it bought LG Corp (LGC) in price ranges between W18,071 and W28,943 and sold at W24,910. Market speculation is that it made around $50 million from the sale of LGC and lost $100 million in the sale of LGE - representing a net loss of $50 million.

The $1 billion block trade was executed by Citigroup and in the case of LGE was priced at 3.88% discount to the market close and for LGC a 4.92% discount - as compared to the 7% discount UBS priced Sovereign's $900 million SK Corp stake at.

The deal was bid out at 4pm on Monday and benefited slightly from a 1% spike in the Korean market that day. However, market observers say the deal was not easy, although Citigroup has told the market it was fully subscribed.

The Korean market is currently on a rising trend and Citi itself has very bullish views on LGE - with a buy recommendation and a price target of W81,000. It does not cover LGC with research.

In all, around 60 fund managers bought the LGC block and over 120 bought the LGE block. The respective blocks represented 11 days worth of LGE's trading and 15 days worth of LGC. In all Sovereign sold out of its entire stakes: 10.1 million shares in LGE and 12.1 million LGC shares.

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