Singapore PE firm proposes KT&G spin off ginseng biz

A Singaporean private equity firm has proposed a number of measures to KT&G Corp., the world’s fifth-largest tobacco maker, including a spin-off of its ginseng business to boost shareholder value and profitability.

Flashlight Capital Partners Pte. (FCP) also suggested the South Korean company expand its heat-not-burn products into the global market, divest non-core assets, triple its share buyback program as well as improve its environmental, social and governance, according to its letter to key shareholders on Wednesday. It was also known to have sent the letter to KT&G’s board of directors.

“We believe taking these steps can unlock 100% share price appreciation over the next 12 months, and five times over the next five years,” the PE firm said, adding that KT&G currently trades at a 50% discount to the intrinsic value of its assets.

After the letter, KT&G’s shares rose much as 3.1% in early morning trading in the South Korean stock market, far outperforming a 0.8% gain in the Kospi.

FCP, founded by Sanghyun Lee, a former head of US PE giant The Carlyle Group’s South Korean unit, was estimated to currently hold less than a 3% stake in KT&G.

A source with direct knowledge of the company said its management plans to unveil a mid- to long-term vision including global strategies for the ginseng business soon.

FRIENDLY SHAREHOLDER ACTIVISM

KT&G faced threats of a hostile takeover by a group of investors led by US billionaire Carl Icahn in the mid-2000s after the company’s privatization. Icahn and his partner, hedge-fund manager Warren Lichtenstein, asked management to spin off its ginseng and real estate assets, increase dividends and buy back shares.

Investment banking industry sources in Seoul, however, said FCP's proposals are different.

“FCP appears to have a friendly relationship with KT&G,” said one of the sources.

The PE firm said it had private discussions with leadership to share its recommendations including a corporate spin-off of the ginseng business, Korea Ginseng Corp., over the past six months.

FCP is understood to seek friendly shareholder activism with an aim to bolster corporate value by matching the interests of the board of directors and those of shareholders. In South Korea, Truston Asset Management Co., which declared a plan for management participation in a local underwear maker BYC Co., is pursuing a similar goal.

The Singapore-based PE firm said it believes embracing meaningful ESG improvement and adding fresh perspectives to the board of directors can help KT&G close its significant 50% trading discount and deliver enhanced value to all stakeholders.

On the environment, KT&G can become the world’s first tobacco company to achieve 50% of its total sales from heat-not-burn products, FCP said. In society, the company can provide tremendous support to over 4,000 ginseng farmers in South Korea by building a global ginseng brand.

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