Ever since it started buying up shares of SK Corp., Monaco-based Sovereign Asset Management has waged a battle to force reform upon the flagship of the nation's third-largest conglomerate. In mid-June, that quest suffered a severe blow. SK Corp. and a group of Korean banks agreed to a multibillion-dollar bailout of an insolvent trading affiliate, SK Global, even though the company is hopelessly in debt. Under the deal, SK Corp., South Korea's biggest oil refiner, would pump more than $700 million into the affiliate. The move came after a Seoul court on June 13 convicted Chey Tae Won, chairman of SK Corp., and other top executives of accounting fraud and illegal trading.
But Sovereign isn't about to give up. Instead, the secretive investment firm, a veteran of such rough-and-tumble emerging markets as Russia, Brazil, and the Czech Republic, is turning up the heat. Spearheading a revolt by foreign investors, Sovereign is going public with a blistering attack on SK Corp. and the broader SK Group. Among other things, Sovereign Chief Operating Officer James Fitter charges that enormous gaps in SK's finances still have not been accounted for.
Fitter also charges that the bailout plan is unrealistic, and that Chey and other execs are still running the company. "One has to ask why the domestic banks would wish to entrust the funds of their shareholders and foreign banks to directors who have been convicted as directly responsible for a long-term program of corporate pillage," says Fitter. SK Group spokesman Lim Su Kil says keeping Global afloat will be less costly for lenders and investors than its liquidation.
But Sovereign, which owns just under 15% of SK Corp., has foreign investors and local shareholder activists on its side. "The bailout program will only end up prolonging chaebol abuses," says Jang Ha Sung, a Korea University finance professor. Sovereign's ultimate goal is to oust the top management of SK Corp. and to break the company's financial links with weak group affiliates. It wants SK Corp. to write off its 39% stake in SK Global and also billions in unpaid debts.
Scuttling the SK Global bailout won't be easy. Korean banks, suffering from mounting bad loan problems, are desperate to avert corporate failures that will hit their balance sheets. "With the Korean economy in bad shape, the government, creditors, and SK all seem eager to bury the bomb for now," says Kim Sang Jo of shareholder activist group People's Solidarity for Participatory Democracy.
Another reason SK Global generates some sympathy is that many of its problems are a legacy of Korea's old chaebol model. It absorbed the overseas trading losses of other SK Group affiliates when Korea Inc.'s top priority was to boost exports at all costs.
Sovereign counters that SK Global is a "financial black hole" that is beyond salvage. Under the rescue plan, SK Corp. and Korean banks would write off some $2.5 billion in SK Global debt in exchange for new stock. But the trading company's debts exceed its assets by $3.7 billion, and given SK's record of malfeasance, "it would be foolhardy to assume that the leaks have been plugged," Fitter says.
Also, SK Global's rescue plan locks in place a system in which SK Global is the sole domestic distributor for all of SK Corp.'s oil products and all of the phones sold by SK Telecom Co., another affiliate. Fitter, along with many other financial analysts, says there is no business logic to channeling sales through SK Global other than to prop it up. For Fitter and Sovereign, to let SK Global die is to protect their investment. For their less self-interested allies in the fight, it's about making Korea safe once and for all for global investment.
By Moon Ihlwan in Seoul