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Icahn: A Korean Welcome Is Unlikely

Corporate raider Carl Icahn has won an important battle, but his Korean war is far from over. Icahn's ally Warren Lichtenstein was elected on Mar. 17 to the board of KT&G, the country's former tobacco monopoly, at the company's annual shareholder meeting. It marks the first time a foreigner at odds with management has been elected to a Korean company's board. A victory for Icahn and Lichtenstein to savor, no doubt.

But the outcome of the bigger fight -- for the future of KT&G -- remains hardly a sure thing. Lichtenstein, who heads hedge fund Steel Partners II, polled the most votes at the meeting in the central Korean city of Daejon. He beat out Ahn Yong Chan, chief executive of Korea's Aekyung Co., the nominee favored by KT&G's management. Yet as the No.2 vote-winner, Ahn beat a different Icahn candidate for the another seat up for grabs, meaning 11 of the company's 12 directors still side with current management.

The victory is mixed. The foreign investors who own 60% of the company largely backed Lichtenstein, so they'll welcome his seat on the board. But after management maneuvers that rendered Icahn's candidates ineligible for four other available seats -- and Ahn's strong backing among Korean shareholders -- Lichtenstein may have a hard time making his voice heard (see BW Online, 2/24/06, "What Does Icahn Want?").

NO MAJOR CHANGES. "It certainly makes sense for foreign shareholders to have an independent voice promoting shareholder value," says Kim Sun Woong, head of the Center for Good Corporate Governance, an independent watchdog group.

One thing is clear: The vote represents an endorsement of change at KT&G. Lichtenstein noted his election came despite "a coordinated campaign" by management to block plans to shake up the company. "They should know that I have never been a passive investor or director," he said in a statement. KT&G chief executive Kwak Young Kyoon responded that he would discuss ways to improve the company with all board members, but made one thing clear to reporters at the meeting: "There won't be major changes in the company's policies."

Icahn and Lichtenstein, who control some 7% of the company, want a shakeup they believe will increase the stock's value. Their demands include selling off old factory sites, unloading noncore assets, and offering shares in a fast-growing subsidiary that sells beverages and other products made from ginseng, a traditional herbal tonic. Kwak and his team have spurned the requests (see BW Online, 2/27/06, "South Korea: An Unruly Guest From The West").

UNCLEAR INTENTIONS. Investors don't seem terribly happy about the vote. Shares of KT&G, one of the best performing Korean stocks so far this year, closed at $55.60 on Mar. 17, down 2.2% from the previous day. That's below the $61.80 a share that funds controlled by Icahn and Lichtenstein offered for KT&G on Feb. 23, which valued the company at about $10 billion -- though they have yet to file with Korea's regulators the various documents required for a formal takeover bid.

If the U.S. financiers go ahead, it will mark the first hostile takeover attempt by foreigners for a Korean company. But so far, Icahn's intention is unclear. Lichtenstein suggested in February he wanted a friendly acquisition, but after Kwak rejected the takeover proposal, the U.S. investors said they might bring their bid directly to shareholders.

Many fund managers in Korea believe Icahn's chances of success look slim. Korean companies typically close ranks when confronted by foreign activists. Already Woori Finance Holding Co. and state-run Industrial Bank of Korea have said they will consider purchasing KT&G's treasury stock -- representing 9.6% of outstanding shares -- to help the management defend against foreign predators. Lichtenstein has pledged to prevent the company from selling treasury shares, saying it is already overcapitalized.

STRONG MESSAGE. Indeed, nationalist sentiment is building in reaction to Icahn's move. The reason: KT&G is one of a dozen or so model companies with relatively good corporate governance and an emphasis on shareholder-friendly policies, such as using about half of net profits as dividend payments. Since its 2002 privatization, KT&G share price has tripled.

"I think Icahn picked the wrong target," says Jeon Byeong Seo, research head at Daewoo Securities in Seoul. "There really isn't much the U.S. investors can do if the Korean board members gang up against Lichtenstein."

Icahn's campaign, nevertheless, could have an impact on corporate Korea. "This will send a strong message to Korean CEOs that they'll be a target if their companies are nontransparent or run inefficiently," says Lee Phil Sang, a business administration professor at Korea University in Seoul. "M&A is an important market mechanism, but demands for legal changes will certainly mount to stop foreigners taking over strategic Korean companies."

At the entrance of the annual shareholders meeting, about 30 KT&G union representatives, wearing red headbands and white masks, protested Icahn's tactics. Some carried banners reading: "Corporate Raider Icahn, Get Out" and "Protect KT&G from Speculative Funds." Icahn may find that Korea's longstanding wariness toward foreigners proves just as tough to overcome as the resistance at Time Warner (TWX), his last target (see BW Online, 3/6/06, "Carl Icahn: Still An Improbable Robin Hood").

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