Hyundai Group founder Chung Ju Yung Tuesday morning sold 12.7 million Hyundai Motors shares, equivalent to a 6.1% stake, at prices ranging from W15,600 to W15,800 a share ($13.04 -$13.73)- a discount to Monday's closing price of W16,800. Because the share price didn't fall through the floor and the shares were offloaded within 15 minutes of the market's opening, rumours were rife that Chung Ju Yung had placed them into friendly (possibly family) hands so as to retain influence over Hyundai Motors.
"Given that there was no significant negative price impact, it is highly likely Hyundai pre-arranged the sales. It is, however, very difficult to confirm," says one research head. Stockmarket regulations require listed companies to reveal shareholders with stakes of 5% or more, but in this case the holding was sold in small parcels to a number of investors.
"It is not clear whether the government will accept this kind of selldown. There will probably be an investigation into who the buyers were," says Richard Pyo, analyst at Credit Suisse First Boston.
Hyundai bests JF
That Chung Ju Yung should have carried out some pre-marketing does not come as a suprise; he was under orders from the Korean government to proceed with a quick sale. What's more, he - or rather Hyundai Securities which handled the stake sale - did a better job than Jardine Fleming in drumming up interest.
Hyundai Group spokesman Lee Young Kyu says Jardine Fleming initially said it would find buyers for over 10 million of the 12.71 million shares to be sold, but the broker only managed to find buyers for 2.5 million shares at W15,100 each. "We had to sell 12.7 million shares so we had to collect the funds on our own."
Jardine Fleming is keeping pretty quiet on the matter. Spokeswoman Corliss Ruggles says: "The report saying Jardine Fleming has bought a stake in Hyundai Motors is not correct and Jardine Fleming has not done a placement for Hyundai Motors."
Regardless, buyers were found for the Hyundai Motors stake Chung Ju Yung had to sell as part of the Hyundai Group's on-going restructuring. What's more, it probably wasn't too hard finding buyers for the stake - Hyundai Motors is financially robust, it's poised to report record earnings of around W500 billion ($449 million) this year, the company has DaimlerChrysler aboard as a strategic investor and, following the Chung Ju Yung stake sale, is about to sever ties with the rest of the Hyundai Group - a move that should lead to its shares commanding a higher price/earnings multiple.
Hyundai Securities says 60% of the shares sold by Chung Ju Yung wound up in the hands of institutional investors and 40% went to individuals.
Hae Kyoon Lee, acting chief investment officer of Templeton Investment Trust Management in Seoul, says "the great bulk of the shares went to Korean pension funds". "It probably was a tempting price to get into Hyundai Motors. Hyundai Motor's fundamentals don't look too bad," he adds.
CSFB's Pyo also considers Hyundai Motors shares attractive, though there may be some short-term pressure on the shares while buyers of Chung Ju Yung's stake take profits. The W15,600 to W15,800 price range at which Chung Ju Yung's shares were sold was "very attractive" from an investor's perspective, Pyo says.
Liquidity squeeze
If Hyundai Motors' shares were in demand, one would have to question the wisdom of Chung Ju Yung acting in bad faith and placing his Hyundai Motors shares in friendly hands. "Everyone knows what the government wants - it wants Chung Ju Yung to sell his Hyundai Motors shares ... If Chung Ju Yung does not do that, the threat is very real. The government could squeeze the liquidity out of Hyundai Engineering," says Templeton's Lee.
The prospect of the government squeezing Hyundai Engineering and Construction into liquidation is an unlikely one; the move would lead to massive job losses and force many of the construction company's suppliers and sub-contractors into bankruptcy. Nonetheless, the government can make life very difficult for Hyundai Group and the Chung family. What's more, the Hyundai Group restructuring is being looked upon as a test of new Finance Minister Jin Nyum's ability to reform the Korean corporate and financial sectors. Jin is likely to take firm action if the Hyundai Group's restructuring plan is not adhered to.
The W200 billion proceeds of the Hyundai Motors stake sale will be used by Chung Ju Yung to purchase commercial paper from Hyundai Engineering, which has been facing severe liquidity problems as a result of banks and investment trust corporations being unwilling or unable to roll over maturing debt. The W200 billion injection of funds has great significance insofar as it signals the start of Hyundai Group's restructuring, but a fairly token gesture when one considers that Hyundai Engineering owes W5.4 trillion, W775 billion of which falls due between mid-August and end-September.
The on-going restructuring is expected to raise another W1.52 trillion for the group via subsidiaries sales of shareholdings in affiliated companies and various asset disposals. Hyundai Heavy Industries is earmarked to be spun off from Hyundai Group and corporate governance is supposed to improve. The restructuring proposals also require the Chung family to hand management control of the group and its units to professionals. Chung Ju Yung has said he will step down as has one of his sons, Chung Mong Hun (MH), Hyundai Group chairman. Chung Mong Koo (MK), chairman of Hyundai Motors, has so far refused to yield.
If, as appears to be the case, Hyundai Motors has split from the Hyundai Group then opposition to MK continuing as chairman should be fairly low-key, particularly given the fact relations between him and other family members, most notably his father and MH, are strained.
Hyundai Motors shares closed Tuesday down W700 at W16,100.
