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Corporate restructuring

Korean firms split into new units for fair valuation amid uncertainty

The vast majority of firms that announced spin- or split-off plans over the past year have seen stock prices rise

By Jun 13, 2021 (Gmt+09:00)

SK Telecom CEO Park Jung-ho announcing the company's spin-off plan in April
SK Telecom CEO Park Jung-ho announcing the company's spin-off plan in April

The blurring of industry boundaries and increasing new opportunities in the pandemic era are driving major Korean companies to split businesses into separate entities.

According to the Korea Exchange (KRX) and financial research firm FnGuide Inc., there were 58 corporate spin-offs or split-offs from last June to June 11 of this year. Split-offs were the Korean companies’ preferred option, making up 49 out of the 58 cases.  

The total number of cases over the past 12 months was 58.0% higher than the 10-year annual average from 2010 to 2019, which was 36.7 cases. The number of cases in 2019, when the country was not yet hit by the coronavirus, was 44. 

The split-off method creates a wholly owned subsidiary under the existing company and thus does not distribute shares of the new company to existing shareholders. LG Chem Ltd.’s decision to create a separate battery company, LG Energy Solution. falls under this category.

In the spin-off method, on the other hand, the parent company distributes shares of the new subsidiary to its existing shareholders on a pro rata basis. SK Telecom’s recent announcement to divide itself into a telecom unit and a non-telecom investment company is such an example.

LG Chem CEO at the shareholders' meeting where the decision to split off LG Energy Solution was made.
LG Chem CEO at the shareholders' meeting where the decision to split off LG Energy Solution was made.

Analysts say that the split-off has been the preferred method by Korean companies as it can raise additional funds without diluting ownership over the new subsidiary.

“With the advent of the Fourth Industrial Revolution, raising additional funds and making strategic decisions quickly have become necessary for survival. Expanding business by splitting into new units is now a global trend,” said Professor Lee Byung-tae of Korea Advanced Institute of Science and Technology.

Many point to Google’s creation of parent company Alphabet Inc. in 2015 as a benchmark. A total of eight different companies, including Google, came under the Alphabet umbrella following the announcement.

Google's 2015 corporate restructuring plan (Courtesy of Wikipedia)
Google's 2015 corporate restructuring plan (Courtesy of Wikipedia)

While there were many doubts about the global tech giant’s decision and even some criticism from Wall Street, Google was able to quiet the naysayers by quickly expanding into new businesses outside its traditional search engine and advertising segments.

In just five years since its 2015 decision, Alphabet’s stock price has quadrupled. Its new streamlined decision-making structure has allowed the company to conduct several dozens of M&As every year and remain the global leader of the Fourth Industrial Revolution.
 
SHARPENING KEY COMPETENCIES FOR VALUATION & EXTRA FUNDING

Some say SK Group this year is making similar moves to that of Google in 2015. After SK Telecom’s board decision to spin off SKT Investment Co., its stock price on June 11 reached a historic high of 339,500 won ($304.06) per share and closed at 334,000 won ($299.14).

“The Korean firms will continue to split into new entities for at least a while. Many companies are enjoying a renewed valuation in the stock market after announcements on spin-offs and split-offs,” said Growth Hill Asset Management Co.’s CEO Kim Tae-hong.

The search for fair valuation is also regarded as the main rationale behind LG Chem’s decision to create LG Energy Solution as a standalone company.

Prior to LG Chem’s decision to create LG Energy solution, some analysts in Korea stressed that the company’s battery business could not receive a fair valuation due to its structural connection to LG Chem’s other segments such as petrochemicals and plastics.  

The Korean financial circle also expects that LG will secure the desired amount of funding following the battery unit’s IPO planned for this year.

Entertainment powerhouse CJ ENM Co.’s establishment of the drama production unit Studio Dragon Corp. is also considered a success story. Studio Dragon’s market cap is currently around 3 trillion won ($2.69 billion).

Studio Dragon is the creator behind many Korean dramas to gain global acclaim.
Studio Dragon is the creator behind many Korean dramas to gain global acclaim.

Hyosung Group’s creation of four companies, Hyosung Chemical Co., Hyosung TNC Corp., Hyosung Advanced Materials Co. and Hyosung Heavy Industries Co., under the parent company of Hyosung Corporation in 2018 is also a spectacular growth story.

Hyosung Group’s market capitalization has grown from 4.7 trillion won ($4.2 billion) to more than 8 trillion won ($7.2 billion) in just three years since the group-wide restructuring.

A COMPREHENSIVE STUDY ON STOCK PRICE IMPACT
 
The financial research firm FnGuide conducted a stock price analysis of 55 of the companies that publicly announced their plans to either spin off or split off separate entities from last June to June 11 of this year. Of the 55 firms studied, 40 saw their stock prices move upwards, whereas 12 saw noticeable drops.

Doosan Corp. saw the highest rise with a growth rate of 107.96% since its announcement on Sept. 4 of last year. Kakao Corp.’s stock price also rose by 38.28% after its announcement on March 12 to split off its music unit Melon Company.  

On the other hand, Kolon Life Science Inc.’s stock price dropped by 19.43% since its split-off announcement on Oct. 16, 2020 to create Kolon Biotech, a separate bio-manufacturing company.

Stock Price Changes of 10 Major Korean Firms that Announced Spin-off/Split-off
Company Name Announcement Date % of Price Change
Doosan Corp. September 4, 2020 107.96%
KCC Corp. September 17, 2020 95.82%
Hwaseung Corp. September 28, 2020 82.91%
Kakao Corp.  March 12, 2021 38.28%
LG Electronics Co. December 23, 2020 33.93%
LG Chem Ltd. September 17, 2020 21.17%
HYBE Co. April 1, 2021 13.27%
Osstem Implant Co. April 15, 2021 7.83%
F&F Holdings Co. November 20, 2020 -16.97%
Kolon Life Science Inc. October 16, 2020 -19.43%

Analysts say that while the method -- whether it’s a spin-off or split-off -- does not seem to have a direct correlation to the stock price trend, growth outlook and earnings results both had a direct impact on the price.

They say Doosan was able to double its valuation in less than a year from its split-off announcement mainly because the numbers in its financial statements began to improve.

“Doosan Group’s restructuring efforts have been improving its financial figures. Its earnings are likely to further rebound this year. Such clearing of uncertainties will offer further momentum for Doosan’s stock price to move upward,” said Hi Investment & Securities.

While Doosan Group’s stock price growth was largely due to its positive earnings results, Kakao’s stock price rise was mainly driven by the investors’ positive outlook on its entertainment business.

Kakao’s Melon Company is the country’s largest music subscription service with over 28 million users. According to Kakao, Melon will merge into Kakao Entertainment prior to its IPO. Kakao Entertainment, which will also include Kakao’s over-the-top (OTT) streaming service under its umbrella, is valued at more than $8.9 billion.

On the other hand, Kolon Life Science was still in the red in the first quarter of this year, after having posted an operating loss of 25.8 billion won ($23.1 million) on revenue of 129.4 billion won ($115.9 million).  

DRAWBACKS & CONCERNS

Some industry experts note that the Korean companies must find ways to minimize shareholder dissatisfaction, as the widely preferred method of split-off fails to distribute shares of the new subsidiaries to the parent company’s existing shareholders.

“More South Korean companies will implement split-off measures in preparation of the Fourth Industrial Revolution. They must find ways to minimize shareholder dissatisfaction,” said Koh Tae-bong, the head of research at Hi Investment & Securities Co.  

Shareholder dissatisfaction largely comes from  increased volatility in the market, stemming from events such as the National Pension Service’s decision to dump $265 million of LG Chem shares last November after the announcement of the creation of the standalone battery entity, and LG Chem’s 6.73% stock plunge in May after Credit Suisse’s downgrading of the company in relation to LG Energy Solution's IPO plans.

Another issue comes from the discrepancy in compensation and incentive schemes. The newly created entities, often the fastest-growing units within the business group, are likely to have better-paying incentive structures. While such a discrepancy is good for those joining the new company, it can create a relative sense of deprivation for those staying in the original company.

“Well, it’s still a big advantage to be able to run a separate compensation scheme, which can attract a large pool of new talent,” said an official at a major Korean company.

Write to Yun-sang Ko and Eun-seo Koo at kys@hankyung.com

Daniel Cho edited this article.

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