KT&G’s hidden saviors in activist fight: In-house funds

KT&G Corp., the world’s fifth-largest tobacco maker, will likely get support from in-house shareholders in a battle against activist funds with larger stakes than its top shareholder.

The employee stock ownership association, as well as the company’s five funds and foundations, were estimated to have held a combined 11% stake in the leading South Korean cigarette producer as of end-September 2022, according to banking industry sources. That's more than the 7.44% stake of its single largest shareholder, the National Pension Service (NPS).

“The employee stock ownership association and in-house funds are expected to support the current management’s decision when exercising their voting rights,” said a source at a domestic brokerage.

KT&G is forecast to face a fierce battle against activist investors at its annual shareholder meeting later this month, as hedge funds such as Flashlight Capital Partners Pte. (FCP) requested measures including a spin-off of its wholly owned ginseng unit.

Last month, a group of funds filed an injunction with a local court asking that the company include the requests it had refused as part of the meeting agenda.

SUPPORT FROM FRIENDLY SHAREHOLDERS

KT&G operates two scholarship and welfare foundations, as well as three in-house welfare funds for its employees.

“The company donated treasury stocks to those foundations as part of its social responsibility activities to support the socially disadvantaged. Their 11% stake cannot be traded in the market,” said a KT&G official.

When asked about exercising voting rights, the official said: “Each foundation and fund will make their own decision."

These foundations and funds are expected to back KT&G at the shareholder meeting, industry sources said. Company CEO Baek Bok-in heads the scholarship foundation, while a former CEO, Min Young-jin, oversees the social welfare foundation.

Some investors have criticized KT&G for using monies from those foundations and funds to buy back shares. Share buybacks without cancellations could stoke expectations that the management may use the treasury stocks to defend against shareholders' requests, they added.

“Treasury stocks are often used for purposes other than for improving shareholder value,” said Lee Sang-heon, an analyst at HI Investment & Securities Co. “With treasury stocks, cancellations are the only way to boost corporate value over the longer term.”

To this end, KT&G in January said the cancellation of treasury stocks is not the only measure being used to raise shareholder value.

The company, which holds treasury stocks equivalent to about a 15% stake, plans to repurchase its own shares for 300 billion won ($231 million) this year.

“Capital is reduced when treasury stocks are purchased, not when they are canceled,” said the company. “The timing of the treasury stock purchases has a direct impact on indicators linked to corporate value such as return on equity.”

Write to Dong-Hui Park at donghuip@hankyung.com
 
Jongwoo Cheon edited this article.