MBK Partners, a private equity firm seeking to acquire Korea Zinc, the world's largest zinc smelter, has come under criticism for excessive betting to hoist its stake in the zinc producer, which could put its investors at risk.
MBK, in partnership with Young Poong, Korea Zinc's largest shareholder, has been raising the ante to obtain the management rights of Korea Zinc in a monthslong battle with the firm’s management.
According to news reports Monday, the private equity company reportedly bought the zinc maker's shares from late October to early November at much higher prices than the company's intrinsic value estimated at 14 trillion won ($9.74 billion).
MBK's special purpose company, Korea Corporate Investment Holdings conducted over-the-counter purchases 15 times from Oct. 18 to Nov. 11, securing an additional 282,366 shares, or 1.36 percent of Korea Zinc stock, increasing its stake to 39.83 percent.
The firm invested 292.1 billion won in total, with the price ranging from 824,394 won to 1,332,930 won a share.
Through two preliminary injunction hearings regarding Korea Zinc's tender offer of treasury stock, MBK said that Korea Zinc purchased treasury stock at 830,000 won and 890,000 won, claiming that the amount is higher than the fair stock price and caused damage to the company equivalent to the price difference.
In stark contrast to their criticism, they ended up buying Korea Zinc stocks at a higher price than Korea Zinc’s management and sent the market cap doubling to 30 trillion won this month.
There have been speculations that MBK scooped up additional shares of Korea Zinc after Nov. 11, as securing as many shares as possible before the extraordinary shareholders' meeting in January of next year has emerged as a crucial factor. Korea Zinc’s share price jumped to exceed 2 million won a piece at some point in December.
At a press conference on Dec. 10, MBK Partners Vice Chairman Kim Kwang-il said he could not confirm whether the firm purchased additional Korea Zinc shares after Nov. 11.
Concerns have been raised about MBK’s future exit plan. Industry sources suggest it could be hard for limited partners -- the investors who provide capital to MBK’s fund, such as Korean and foreign pension funds, sovereign wealth funds and mutual funds --to receive investment returns as much as they expected because of MBK’s hefty spending on Korea Zinc shares.
“If MBK continues to acquire shares at a level higher than the fundamental corporate value of Korea Zinc explained to limited partners and the overpayment controversy becomes public, it could fall into major trouble,” an industry official said.
MBK also took a loan from financial institutions.
Korea Corporate Investment Holdings borrowed 1.57 trillion won from NH Investment & Securities to raise funds for the tender offer of Korea Zinc's treasury stock with a maturity period of 9 months and the minimum fixed interest rate set at 5.7 percent.
The interest cost for the borrowing is expected to stand around 90 billion won, which could affect the investment return and pose a risk for investors taking part in MBK’s fund.
“Continuing to purchase shares of Korea Zinc, whose stock price has risen in a short period, may worsen the conditions for stable fund recovery for fund investors,” said another official from the investment industry.
The official warned that MBK’s excessive bet may lead to a significant loss of Korea Zinc’s competitiveness as the equity fund could offload the zinc producer’s assets to make up for its overpayment.
