Late on Friday, Sovereign Asset Management sold its nearly 15% stake in Korean oil refiner, SK Corp at a 7% discount to the market close. The exit marks the end of an acrimonious relationship between Sovereign and the chaebol's Korean management and its key shareholder (and chairman), Chey Tae-won.
Sovereign, predictably enough, emerged from the sale with a press release (it has barraged the media with press releases in the past 18 months), that stated: "Having exhausted all of the legal rights currently available to shareholders under Korean law, Sovereign is now exercising the only meaningful right remaining open to us - withdrawal from our investment in SK Corp."
A Martian reading the press release would probably have surmised that Sovereign's investment had been an unmitigated disaster. In fact, this is probably the most bizarre aspect of the whole situation.
Sovereign's hard-done-by tone may beckon commiseration, but the reality is paradoxically the reverse: namely that Sovereign's investment is probably among the most lucrative in Asian history, and certainly the most lucrative in Korea's post-crisis history. Indeed, as we move into an era of less than stellar returns from Asian private equity, there will be some who will look back on Sovereign's investment in SK Corp as representing the fleeting apex of a golden age.
Sovereign began investing in SK Corp on March 26, 2003 and by April 11 of that same year had built a position that made it a major shareholder with 14.82% of the company. It purchased 19,028,000 shares at an average price of W9,293 per share.
To be fair to Sovereign, this looked a very gutsy decision at the time. Indeed, with oil prices and refining margins way below their current levels, and the whole SK Global situation rendering SK companies toxic, it was an example of a very brave investment call.
In the ensuing period, a combination of significantly higher oil refining margins and better corporate governance at SK Corp (in part, thanks to Sovereign's agitation) led to a big improvement in the stock price. On Friday evening, Sovereign sold its entire stake at W49,011 per share, which equated to $899.3 million.
This means that Sovereign made about $728.8 million on the trade. If you add that to the $34 million of dividend that SK Corp paid Sovereign this year, that amounts to a $762.8 million total profit.
Sovereign held its position in SK Corp for about 838 days (including weekends). On that basis Sovereign has made about $910,262 for each day it has owned the Korean oil refiner. Based on just working-days, it has made far more than $1 million per day on its investment.
It hardly needs saying that this is a phenomenal return. To put it in perspective, it is considerably better than Carlyle's return from its sale of Koram to Citigroup - a deal that previously held the record.
Over Carlyle's approximately 1,335 day investment in Koram it made about $749,063 per day. Meanwhile, Goldman's (not yet finalized) exit from Jinro's distressed debt is set to make the US bank a profit of around $196,000 per day, based on the 2,555 days the investment was held for.
On the basis of profit-made-per-day it would be a challenge to find any Korean investment that has been more lucrative than that of the Chandler brothers of New Zealand who are behind Sovereign.
So why are they complaining?
There are two central planks to their complaint. The first is that while SK Corp has done well, its stock has not done as well as S-Oil, which makes less profit but has a higher market capitalization. Sovereign has long argued that this is because SK Corp has inferior corporate governance.
That brings us to the second plank of the complaint: Chey Tae-won. Sovereign's mission has long been to have him removed as chairman, based on its lack of trust for a man who was convicted and sent to jail.
As our cover story in March ("Chey fights back") pointed out there are many shades of grey to this story. It is not quite as simple as Sovereign would like many to believe. Concrete improvements have been made to SK Corp's corporate governance, and a record dividend was recently paid out.
Indeed, a referendum on Chey and the company's management was carried out at the AGM in March. All investors were lobbied heavily and this was Sovereign's best opportunity to have Chey displaced as chairman, since he was forced to stand for re-election.
Indeed, since more than 50% of the share register was comprised of foreign investors, and only a simple majority was required to oust Chey, this vote really came down to whether 'foreign investors' agreed with Sovereign or agreed with existing management. In the event, Sovereign got a bloody nose, with 60% of investors voting to give Chey a new three year term.
Our cover story pointed out in its concluding paragraphs: "Having lost the vote Sovereign's position has been undermined, especially since some foreign shareholders effectively voted against Sovereign and switched to the Chey camp. As a result, Sovereign can no longer make the tacit claim to speak for all foreign shareholders... Round one went to Chey, and if his appeal is successful and his criminal record is expunged, that would be round two to Chey - and possibly even a knockout blow for Sovereign's case."
This turned out to be basically what happened - although with a somewhat Korean twist. Last month the Seoul Appeals Court upheld Chey's conviction (for his role in the bankruptcy of SK Global), but more crucially quashed his three year prison sentence and justified the decision by saying he was playing a critical role in improving corporate governance at SK Corp.
This was a clever decision in the Korean context. It basically vindicated Chey, but by not expunging the conviction, left the sword of Damocles above his head in case he was ever tempted to stray again.
From Sovereign's perspective, however, it was a strategic disaster. The court's quasi-vindication made any hope of having Chey removed appear remote.
Meanwhile, as long as SK Corp kept delivering solid profits, and healthy dividends it became harder and harder for Sovereign to sustain it PR campaign - which basically came down to its contention that SK Corp was a badly governed company.
That campaign looked less solid when SK Corp reported the highest dividend in its 42 year history, and became the first Korean energy company to cross W1 trillion in annual profit. And with oil prices rising and refining margins still firm, there was no sign that SK Corp was going to give Sovereign a PR coup with a dreadful set of results.
Meanwhile SK Corp's own PR machine pointed to the fact that much of the recent growth had come from Chey's long term plan to take the company from refining into exploration and production. Likewise, they pointed out that the board of directors was now stacked (just as Sovereign had wanted) with independent directors of high moral character - including one that Sovereign nominated itself.
Thus, when Sovereign changed the status of its investment from 'active' to 'passive' in recent weeks, that was a clear signal that Sovereign also realized that its strategy had hit a wall.
Many recognized that it would only be a matter of time before Sovereign sold. But given that it had held its stake in Gazprom for 10 years, no one could be exactly sure when that would be.
Then last week it mandated UBS to sell its block, and the Swiss bank - which dominates trading of Korean equities among foreign institutional investors - launched a bookbuilding on Friday evening. The bank ended up pricing at a 7% discount to Friday's close, which was the bottom end of the range.
Nevertheless, UBS will be celebrating, since the $900 million block saw the firm jump to the top of Dealogic's ECM league table for the year-to-date with issuance of $3.9 billion from 21 deals, versus Merrill Lynch in second place with $3.7 billion and JPMorgan third on $3.4 billion.
You would think the Chandler brothers ought to be celebrating - given the financial returns they have made. Indeed, if losing means making $763 million, there are a lot of people who would gladly like to lose in such terms. And obviously, Chey and the management of SK Corp will be delighted to be rid of Sovereign.
Thus, with an ecstatic Chey, a celebratory UBS and the Chandlers weeping into their Bollinger, the only party that might qualify as genuine losers in the affair are Sovereign's PR firm, Gavin Anderson. Having broken all records for sending out press releases (on Sovereign's behalf), Gavin Anderson is presumably losing a very lucrative client, and must be very sad that Sovereign's punchy campaign has run its course.
