(Bloomberg) -- Korea Zinc Co. shares tumbled as much as 30% to their daily limit on Wednesday, wiping $7 billion off its value, after the company’s chairman surprised the market with plans for a deeply discounted stock offering, the latest twist in a months-long tussle for control.
The world’s largest producer of refined zinc said in a statement that it plans to issue 3.73 million shares, equivalent to about 18% of its outstanding stock. At an indicative price of about 670,000 won apiece, it would raise about $1.8 billion, which it said would be largely spent on paying down debt.
A fifth of the new shares will be allocated to employees, however, a move seen as potentially bolstering support for Choi, given staff tend to vote in line with the company’s leadership.
“Choi will defend his management at any cost. He keeps using the company’s resources for the sake of his management control, so other general shareholders will get hurt,” said Kim Dojoon, chief investment officer at Zian Investment Management. “This is like a lightning strike for shareholders.”
Korea Zinc’s shares have nearly doubled since September, when top investor Young Poong Corp., backed by private equity firm MBK Partners Ltd, made a bid to buy a controlling stake.
That offer was opposed by a rival faction led by Korea Zinc Chairman Choi Yun-beom, supported by buyout heavyweight Bain Capital, who fought back with a buyback offer that concluded last week.
Choi’s camp currently holds about 35% of the company, after its repurchase plan concluded, with the opposing side commanding more than 38% at the end of its own tender offer, according to the most recent filings.
Both could in theory see their holdings diluted, as purchases are capped at 3% of the offer, a limit the company said was set in order to expand the shareholder base and Korean ownership.
“The new share sale is aimed at diluting the rival’s stake as much as possible before Chairman Choi makes his move toward a proxy fight,” said Park Ju-gun, head of corporate research firm Leaders Index. “If everything goes as planned, Choi’s stake and MBK’s would end up just about one percentage point apart, giving Choi the confidence to think that he may have a shot at winning.”
That would leave victory in the hands of minority investors and Korea’s National Pension Service, who together hold about 14%. NPS has declined to comment on Korea Zinc or its own plans.
Share Surprise
Choi’s latest move caught off-guard investors who had been betting that the battle for control would keep pushing the stock higher. It has also raised concerns over the use of Korea Zinc’s funds and of its capital structure to effectively fend off a suitor.
“The act of defending his management control with a share sale is more than just violating shareholders’ value,” said Park Yoo-Kyung, emerging markets equities managing director at APG Investment Asia Ltd.
MBK Partners has criticized Korea Zinc’s increased debt load under Choi, something the company now says it has begun to tackle. But the buyout firm said on Wednesday that his methods damaged the interests of existing shareholders and prompted questions about a discounted share sale only days after buyback offer completed at 890,000 won a piece.
Korea Zinc has for decades focused mainly on its non-ferrous metals refining business. Choi, a descendant of one of the founding families, has sought to bet the company’s future on green materials, investing heavily in clean power, electric vehicle batteries and recycling.
The other founding family, which controls Young Poong, has opposed what it sees as frequently profligate investments.
The outcome of the fight over the future direction of Korea Zinc will impact the country’s largest conglomerates, or chaebol, who have rarely been faced with private equity challengers. But control of the world’s largest zinc smelter matters also to global efforts to loosen China’s grip on the supply of materials vital to the energy transition.
The new shares are currently being offered at a 57% discount to a record 1,543,000 won level touched at Tuesday’s close, though the final figure may yet change according to bidding, the company said. The stock ended Wednesday at 1,081,000 won.
“This rights offering symbolizes a display of “Korea Discount” at its worst,” said Douglas Kim of Douglas Research Advisory, adding it would likely “put continued negative pressure on Korea Zinc’s share price in the coming weeks.”
--With assistance from Shinhye Kang, Emily Yamamoto, Sangmi Cha, Filipe Pacheco and Jaehyun Eom.
(Updates with closing price, detail on share issue pricing)
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