Regulator puts brakes on Korea Zinc’s $1.8 bn rights issue

South Korea’s Financial Supervisory Service (FSS) has put the brakes on Korea Zinc Inc.'s 2.5 trillion won ($1.8 billion) rights issue aimed at repaying debts used for its recent share buybacks in a battle against an MBK Partner-led takeover bid.

The regulatory body said on Wednesday that it found fault with the rights offering process, which appeared to start during Korea Zinc’s Oct. 4-23 share buyback tender offer period and questioned the rationale behind the new share issue.

It required the world’s largest lead and zinc smelter to revise the prospectus for new share sales.

“After reviewing the securities report submitted by Korea Zinc, we found insufficient details explaining the purpose of the rights offering, its decision-making process, the lead underwriter’s due diligence, the reason for setting subscription quotas and how it differs from its tender offer prospectus,” said an FSS official.

The regulator filed the prospectus revision request with DART, its electronic disclosure system, on Wednesday.

The FSS is conducting on-spot inspections of the two lead managers of the rights offering – Mirae Asset Securities Co. and KB Securities Co. – about any illegal activity related to the offering. The two brokerage houses also handled Korea Zinc’s share buyback tender offer.

On Oct. 30, Korea Zinc surprised the market with the rights offering announcement as its fight against the MBK-led group is expected to escalate into a lengthy proxy battle.

According to the prospectus, Mirae Asset on Oct. 14 began due diligence on Korea Zinc for the rights offering during the Oct. 4-23 buyback period.

The FSS noted that launching a rights offering process in the middle of share buybacks without informing investors of the plan to finance the buybacks with new share issues could violate the Capital Market Act.
 

After the tender offer last month, neither the Korea Zinc-led group nor the consortium between MBK Partners and Young Poong Corp. secured a majority stake. The smelter teamed up with the US private equity firm Bain Capital to counter MBK's attempt to seize control of the company.

NOT TO WITHDRAW RIGHTS ISSUE PLAN

In response to the FSS' request for the prospectus revision and audit of its underwriters, Korea Zinc said it will amend the document to address those issues and proceed with the rights offering.

A revised report must be handed in within three months. Otherwise, it has to cancel the new share issue.

Korea Zinc planned to issue 3,732,650 shares at 670,000 won each, or 25% below its buyback price of 890,000 won, in early December. The new shares will represent 20% of its outstanding shares, excluding treasury stocks that it bought back at 1.8 trillion won last month for cancellation.

Of the 2.5 trillion won in proceeds, it planned to use 2.3 trillion won to pay back debts and relevant costs.

The rights offering announcement was met with a backlash from investors. They argued Korea Zinc would force its shareholders to shoulder the costs of fighting the MBK-Young Poong coalition and would thus hurt shareholder interests.

On Tuesday, MBK founder and Chairman Michael ByungJu Kim said in a brief interview with The Korea Economic Daily that its takeover bid for Korea Zinc was aimed at improving its corporate governance and shareholder value.

Korea Zinc shares lost 2.15% to end at 1,230,000 won on Wednesday, still above Korea Zinc’s buyback price of 890,000 won.

Write to Jong-Kwan Park and Woo-Sub Kim at pjk@hankyung.com
 


Yeonhee Kim edited this article.