South Korea: An Unruly Guest From The West

Icahn's fight at tobacco giant KT&G may spark more activity by foreign investors

You might think Carl Icahn has his hands full with the battle over Time Warner Inc. (TWX ). But he's also been busy making a name for himself in Korea. "Corporate Pirate," "Wall Street Naughty Boy," and "Cold Negotiator" are some of the nicer things Korean newspapers have called the U.S. financier lately. Why the vitriol? Icahn and fellow investor Warren G. Lichtenstein now control 7.3% of the shares of KT&G Corp., Korea's former tobacco monopoly, and are demanding changes they hope will boost the stock's value. The country's opinion leaders, meanwhile, apparently find the notion of foreigners calling the shots tough to stomach.

It's a taste they had better get used to. Until a decade ago, outsiders had a hard time penetrating the erstwhile "Hermit Kingdom." But today foreign investors own 42% of the shares on the Seoul bourse, compared with 13% before the Asian financial meltdown of 1997-98. And at some big companies, foreign ownership is much higher. At KT&G it's 63%. At Korea's largest lender, Kookmin Bank (KB ), it's 85.7%; at Posco (PKX ), the country's top steelmaker, it's 68%; and at Samsung Electronics, it's 54%. All told, 109 foreign investors hold more than 5% of at least one Korean company and have filed papers saying they intend to influence management. "Icahn heralds a new wave of activism by international investors," says Young Chang, head of research at UBS Korea (UBS ). "Soon such a campaign won't be a novelty."

Other factors may accelerate the trend. At least a dozen Korean blue chips, including KT&G, Posco, and Kookmin, lack a controlling shareholder, making it easier for discontented investors to be heard. The Korean won has gained some 20% against the greenback in the past two years, boosting dollar gains for foreigners. And the market is relatively cheap, trading at just 10.2 times estimated 2006 earnings, compared with 18.8 in Japan, 16.2 in Hong Kong, and 15.7 in India, according to Morgan Stanley (MS ).


By many measures, KT&G wouldn't seem to be in the kind of distress that normally draws corporate bottom feeders. KT&G controls three-quarters of Korea's cigarette market, and its net profits -- $528 million in 2005 -- have jumped an average of 14.1% annually in the past four years. Its share price has more than tripled since 2003, thanks partly to shareholder-friendly policies such as doling out half its profits as dividends. And it's often praised for its corporate governance.

Nonetheless, Icahn and Lichtenstein think Chief Executive Kwak Young Kyoon could do better. They say he has depressed profits by holding on to former factory sites instead of selling the real estate. And they want Kwak to unload noncore assets, such as a convenience store chain and a pharmaceutical unit, and list shares in a fast-growing subsidiary that makes drinks and other products from ginseng, an herbal tonic. Icahn and Lichtenstein, head of private investment partnership Steel Partners II, declined to comment for this story. At a news conference, Kwak said their demands were "excessive" measures that would hurt long-term profitability.

Now the stage is set for a proxy fight. When Lichtenstein announced on Feb. 9 that he would seek a board seat, KT&G shares the next day climbed 8.9%. Kwak has signed up Goldman Sachs & Co. (GS ) to help manage the fight. The Korea Center for International Finance, a state-funded research group, says the outcome is tough to predict, with some 30% of shares -- largely held by Koreans -- likely to back management, and 16% currently lined up behind the challengers. Whoever prevails, it seems a new wave of "corporate pirates" is sure to set sail for Korea.

By Moon Ihlwan

    Before it's here, it's on the Bloomberg Terminal.