Another Rude Surprise For Foreign Investors

SK Telecom's rights issue may weaken outside shareholders

Savvy foreign investors love SK Telecom Co. Indeed, South Korea's biggest mobile-phone operator has topped many analysts' buy lists for months. Over the past year, it has returned the affection: Its ADRs have tripled in price on the New York Stock Exchange, to 15 3/8. Although it's 25% owned by SK group, the country's fifth-largest chaebol, investors such as Julian Robertson Jr.'s New York-based Tiger Management Corp. have seen it as a new-style South Korean company--investor-friendly, transparent, and ready to appoint independent directors.

No longer. SK Telecom is now at the center of an international fight over minority shareholders' rights. At issue is a $1.2 billion rights issue planned for July 27 and 28. No. 3 shareholder Tiger, with a roughly 12% stake, even flew in its adviser, former U.S. Presidential candidate Bob Dole, on Jun. 23 to lobby South Korean President Kim Dae Jung against the plan, which Tiger says is an SK Telecom plot to weaken outside shareholders. Two days after Dole met with Kim, the hedge fund applied to Seoul's District Court for an injunction to block the issue.

Tiger isn't the only one crying foul. So are state-owned Korea Telecom--which has an 18% stake--an external auditor, and three outside directors, including Nam Sang Koo, a finance professor at Korea University. Nam, who was named to SK Telecom's board to ensure transparency and protect shareholders' rights, got just over a day's notice before the plan was unveiled on June 14. He says he was given as little information as possible--and as late as possible. "This is not fair play," he adds.

The outside directors--the first ever appointed at a Korean company--are so miffed that they're trying to dump company Chairman Son Kil Seung. That may be tough. In any case, it won't happen until an extraordinary shareholders' meeting scheduled for Aug. 24, which may be too late.

SK Telecom officials say the offering is entirely justified. The company needs the funds, they say, to battle back its competitors, Korea Telecom and LG Group, in Korea's newly deregulated telecom market. "We feel threatened and are in a desperate position," says Cho Min Lae, SK Telecom's vice-president for strategy and planning. "The rights issue was not made for the interest of any particular shareholder."

Maybe not, but shareholders face a stark choice: They can spend heavily on the new issue or see their SK Telecom holdings diluted. Analysts estimate that it would cost Tiger up to $150 million to maintain its stake in SK Telecom. "The company doesn't need the capital," a Tiger spokesman objects, "and [the rights issue is] hugely dilutive to earnings per share." Korea Telecom, which also objects to the offering, could be in an even bigger fix. SK Telecom has long wanted Korea Telecom--which already owns a cellular service, Korea Freetel--to sell its SK Telecom stake.

TRICKY TIMING. Timing is of the essence. The rights issue, of one new share for slightly more than every four shares held, is open to shareholders of record on June 30. That's the day before a local law changes to allow foreign ownership of 49% of Korean telecom companies, up from 33% now--a percentage already reached at SK Telecom. The new shares are expected to be discounted 30%. But given the timing, the number of foreigners who can benefit from that will be kept to the minimum. Furthermore, 8% of the 1.6 million new shares will be reserved for SK Telecom employees. Any shares not subscribed could tumble into the coffers of the SK group. "Unfortunately, it's customary for those shares to go to chaebol affiliates," says Nam.

The best news the dissidents have had came on June 29. The Seoul District Court scheduled a hearing on Tiger's injunction for July 2 and promised a ruling by the month's end. All the same, SK Telecom officials are confident they will prevail. For one thing, Korean law gives directors discretion over rights issues. The board voted 7 to 4 in favor of this one. For another, Seoul has been encouraging Korean companies to shift from debt to equity financing.

Bob Dole's powers of persuasion may not prove much help either. Many Koreans are weary of politicians meddling in business, especially Americans representing foreign hedge funds. But that would be shortsighted. If SK Telecom's management wins hands down, it could set back efforts to open the economy and reform the chaebol.