POSCO approves holding company plan for eco-friendly business

South Korea’s POSCO Co. is set to split off the company to launch an investment holding firm, 21 years after its privatization. The move aims to transform the world’s fifth-largest steelmaker by output into an eco-friendly materials producer while improving its enterprise value.

But to do so, POSCO still needs to clear hurdles such as winning approval from shareholders including South Korea’s National Pension Service (NPS), the world’s No. 3 pension fund, and BlackRock Inc., the world’s largest asset manager.

POSCO Group on Dec. 10 approved a restructuring plan to split off POSCO into POSCO Holdings and a steelmaking company with the holding firm owning 100% stakes in affiliates.

POSCO Holdings is set to be at the top of the group corporate governance structure while affiliates such as POSCO Chemical Co., POSCO Energy Co., POSCO Engineering and Construction Co. and POSCO International Co. will be placed under the holding company.

POSCO Holdings plans to focus on discovering future growth engines, investment management, as well as research and development (R&D) for the whole group. It will keep new businesses such as hydrogen production and secondary battery materials development within the company as business units. It will nurture those sectors with dividends from the affiliates and make them subsidiaries once they reach a certain level of success.

HYDROGEN, BATTERY MATERIALS

In April, POSCO Chairman and CEO Choi Jeong-woo emphasized that the group should shift its business structure from a traditional steel-focused business to “Green & Mobility.”

“In the transition phase of the megatrend to a low-carbon and eco-friendly environment, POSCO Group should go beyond the steel business and take a leap toward becoming a leading company of eco-friendly businesses such as steel and components for electric cars, secondary battery materials, hydrogen energy, and more,” Choi said in a message to mark the company’s 53rd anniversary.

POSCO has been taking on the challenges necessary to transform from a steelmaker based on a large blast furnace production system into a global eco-friendly materials producer. It aims to commercialize hydrogen-based steel by 2050. The hydrogen-based steelmaking process uses green hydrogen instead of coal as a reducing agent to separate oxygen from iron ore, to produce no carbon emissions.

To this end, it plans to secure green hydrogen production capacity of 500,000 tons by 2030 and expand it to 7 million tons by 2050.

POSCO aims to enhance its value chain of secondary battery materials with a target to manufacture 680,000 tons of cathode and anode materials with its own production of 220,000 tons of lithium and 140,000 tons of nickel by 2030.

Both the steelmaking unit and the new business units are expected to benefit from the split-off. The group is predicted to provide more support to the new businesses, which have been regarded as non-mainstream sectors. The group will reduce carbon risk as the reorganization will diversify the business portfolio centered on steel.

“We had difficulties in discovering new businesses and creating sufficient synergy within group companies as our capabilities have been concentrated in the steel business,” said a company source. “The board members agreed that this is the best time to reorganize the management structure, given the emerging revolutionary changes including the shift toward carbon neutrality.”

STEELMAKING UNIT TO REMAIN UNLISTED

After the split-off, the steelmaking unit will remain unlisted, given concerns over the dilution of the equity value among shareholders. The core steel business’ profits are to be reflected in the holding company’s earnings if the unit does not go public after the split-off. POSCO also decided not to list new key businesses such as hydrogen production to alleviate shareholder concerns over parent-subsidiary listings.

Since the group does not have an owner, unlike other local conglomerates, POSCO selected the split-off measure for the separation rather than a spin-off, as the latter, which requires listings of the holding companies and operating subsidiaries, could threaten the company’s management control over its affiliates, industry sources said.

A holding company must own at least 30% of listed subsidiaries, according to the new fair trade laws that will take effect from next year. POSCO’s treasury shares are about 13% of its total outstanding stocks.

POSSIBLE OBJECTIONS FROM NPS

However, the separation plan could face objections from its major shareholders, according to industry sources.

POSCO, once a state-run company, was privatized in October 2000 when the South Korean government sold its stake in the company. The company has maintained distributed governance since then without significant controlling shareholders. As of the third quarter, the NPS, its top shareholder, has a 9.75% stake and BlackRock holds slightly more than 5%. The rest is held by institutional investors, individuals and foreigners.

POSCO needs to get approval for the split-off plan at a general shareholders’ meeting on Jan. 28, 2022. Such a plan must get the nod from more than a third of the total number of issued shares and at least two-thirds of shareholders present at the meeting.

The NPS voted against similar moves in the past, saying the separation of a core business from a parent company would hurt shareholder value.

The pension fund opposed LG Chem Ltd.’s plan to create the separate battery firm LG Energy Solution, as well as SK Innovation Co.’s plan to split off its battery unit.

LG Chem and SK Innovation obtained endorsements from shareholders despite the NPS’ objections as their affiliates were top shareholders. LG Chem’s largest shareholder was LG Corp. with a 30% stake, while SK Innovation’s top shareholder was SK Inc. with a 33.4% stake.

POSCO, however, does not have such a controlling shareholder.

“If the NPS with its dominant market position speaks out at the POSCO shareholders’ meeting, approval of the agenda is uncertain,” said a source at a pension fund. “Smaller asset managers that find it difficult to make their own decisions on voting rights are expected to follow the NPS.”

Individual investors may veto the plan since a split-off plan often undermines share prices despite expectations that such a separation may not hurt enterprise values if the new business does not go public.

POSCO tumbled 4.58% to close at 281,500 won on Dec. 10, far underperforming the 0.64% dip of the main Kospi.

Write to Jung-hwan Hwang, Jeong Min Nam and Jong-woo Kim at jung@hankyung.com
Jongwoo Cheon edited this article.