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Elliott Wins Allies in Blocking Hyundai Motor's Restructure Plan

Scott Deveau, Sohee Kim
Hyundai Motor Co. Santa Fe sport utility vehicles (SUV) stand on display during a launch event for the updated vehicle in Goyang, South Korea, on Wednesday, Feb. 21, 2018. To recapture buyers in the U.S. who have shunned its sedans and compact cars, Hyundai has said it will bring eight new or redesigned crossovers or SUVs by 2020. Photographer: SeongJoon Cho/Bloomberg

Two influential proxy advisory firms have thrown their support behind Elliott Management Corp.’s opposition of an $8.8 billion deal between two Hyundai Motor Group units, signaling more hurdles for an overhaul that may help the founding family’s patriarch pass control of the South Korean conglomerate to his son.

Glass Lewis & Co. and Institutional Shareholder Services Inc. have come out against the restructuring plan, which calls for the automotive giant to sell some of its businesses to affiliate Hyundai Glovis Co. ISS said in a report Tuesday that although the transactions are compliant with South Korean laws, the deal appears to be unfavorable for Hyundai Mobis Co. shareholders. Both advisers urged investors in the parts maker to vote against the plan.

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The criticisms are a setback for the group’s heir apparent, Vice Chairman Euisun Chung, as he prepares for Korea’s biggest proxy fight since Samsung Group narrowly defeated billionaire Paul Singer’s Elliott by muscling through a controversial merger of two units nearly three years ago. Should the Hyundai deal -- which requires a two-thirds majority to pass in a vote scheduled on May 29 -- be blocked, it would mark a landmark victory for foreign activist investors in a country where all such campaigns have failed.

Though Samsung beat Elliott in 2015, allowing the chairman’s son to solidify his grip on the group, it came at a cost as the crown prince of the business empire and the country’s president were jailed for corruption linked to the merger. Elliott is seeking $670 million in compensation from the Korean government for inappropriately meddling in that deal.

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Hyundai Glovis dropped as much as 6.9 percent to a two-month low of 141,000 won as of 9:20 a.m. in Seoul trading Wednesday. Hyundai Mobis declined 1.3 percent and Hyundai Motor Co., the largest company in the group, was unchanged.

“The board has failed to articulate a clear business rationale for the transaction and has not provided any details in support of the purported synergies,” ISS said in its report. “Moreover, despite the board’s claims that the proposed restructuring plan aims to address the circular ownership issues, the transaction itself will have no impact on cross-ownership,” it added.

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Glass Lewis, which provides advice to 1,300 institutional investors, called the plan “profoundly unattractive” in its own report Monday. The deal undervalues the assets being sold, lacks business logic and seems designed to benefit Hyundai’s founding family, the proxy adviser said.

The recommendations from ISS and Glass Lewis may be crucial to the outcome of the Hyundai deal, as neither the Chungs nor Elliott have the votes to determine the outcome. Foreign investors’ holdings in Hyundai Mobis were 49 percent -- more than enough to block the deal -- as of April 12, according to data from the Korea Exchange. The activist investor on Tuesday declined to comment on the proxy advisers’ statements.

Local proxy adviser Korea Corporate Governance Service said it will announce its recommendation on the proposal soon. Sustinvest, a South Korean firm that evaluates corporate actions, said earlier this month that the planned merger doesn’t serve the interests of stakeholders, Yonhap reported.

Hyundai, a sprawling group of 56 companies with more than $200 billion in assets, said it disagreed with the two advisers’ conclusions and that they had failed to recognize the value that the proposed transactions would create for Hyundai Mobis shareholders. It urged investors to support the deal.

The conglomerate aims to establish a corporate structure that “enhances our business competitiveness” while also introducing more transparency, Hyundai Mobis President Young-Deuk Lim said in an emailed statement.

Chung, the 47-year-old son of the group’s octogenarian patriarch, spoke with Bloomberg in an unprecedented interview last week, acknowledging that Mobis needs to do more to win over shareholders.

Read what’s inside Hyundai’s plan to fend off Elliott here.

Elliott, which holds more than $1 billion in three Hyundai units -- Hyundai Motor, Mobis and Kia Motors Corp. -- has opposed the restructuring plan, saying it shortchanges shareholders. Instead of spinning off divisions of a group of suppliers and merging them with its logistics arm, the U.S. fund has proposed that Hyundai Motor Co. merge with Mobis to form a holding company that would oversee the group.

Elliott has also urged Hyundai to return more than 12 trillion won ($11 billion) in cash to shareholders.

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