Elliott's Hyundai Proposal Called Unfair by Korean Regulator

Updated on
  • Hyundai Motor, Mobis merger would violate law, FTC head says
  • Activist investor Elliott is challenging Hyundai management

South Korea’s Fair Trade Commission delivered a potential blow to activist fund Elliott Management Corp. in its battle with Hyundai Motor Group management over dueling merger proposals.

The regulator’s chairman, Kim Sang-jo, said the Elliott proposal would violate a ban on non-financial holding companies owning financial affiliates, according to an FTC spokesman. Kim, speaking at a seminar in Seoul Thursday, said Elliott’s plan was “unfair.” Elliott, which has invested more than $1 billion in Hyundai Motor companies, declined to comment.

The New York-based hedge fund headed by billionaire Paul Singer has opposed Hyundai Motor Group’s planned 10.3 trillion won ($9.6 billion) combination of two units. The investor released an alternative plan on April 23 calling for the carmaker to merge with parts maker Hyundai Mobis Co. and to form a holding company overseeing the group.

While the new entity would include Hyundai Card and Hyundai Capital, the hedge fund has said there are ways to avoid violating the ownership restrictions such as by seeking waivers or separating the financial units from the holding company.

Given that under Korean law, Hyundai would have a two-year grace period to deal with the matter, Elliott believes that would be adequate time to spin off the financial arm as a separate holding company and to sell off some of its less desirable assets, according to people familiar with the matter. 

Hyundai Motor on Thursday pledged to increase dividends and boost shareholder returns, even as earnings tumbled amid sliding sales in its two biggest markets.

The South Korean automaker will make all efforts to hand investors higher payouts, Chief Financial Officer Choi Byung-chul said.

After revealing its investment in the Hyundai Group this month, Elliott has demanded the return of excess cash to shareholders and dividends as high as 50 percent of net income, a ratio “comparable” to global peers.

“We will keep trying to raise the dividend payout to global standards to honor our promise to shareholders,” Choi said on a conference call Thursday. “Based on the improvement in earnings, we will keep reviewing plans to expand shareholder return.”

Elliott’s demands are the latest challenge faced by the Seoul-based carmaker, which said operating profit in the quarter through March dropped 46 percent. Hyundai Motor is struggling to offer enough SUV models in the U.S., where customers are moving away from sedans to the sporty and spacious vehicles. In its No. 1 market, China, the company hasn’t yet rebounded from a blow last year when geopolitical tensions led to the boycott of Korean products on the mainland.

Hyundai Motor and Mobis shares fell in Seoul trading on Thursday.

— With assistance by Scott Deveau

(Updates with background on Elliott’s thinking in fifth paragraph.)
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