$1.7 billion takeover brawl fueled by fear of China

On one side is the 50-year-old Korea Zinc, headed by Yun B. Choi, chairman and grandson of the co-founder, and officials say South Korea’s industrial powerhouse is under siege. On the other side is a South Korean private equity firm headed by the country’s second-richest person, Michael ByungJu Kim, which has joined forces with the family of its second co-founder.

At the center of the dispute is Korea Zinc’s Onsan steelworks in Ulsan, South Korea, and the company’s proprietary technologies. It is perhaps the crown jewel of America’s hopes of creating a supply chain independent of China, which accounts for roughly half of the world’s refined zinc. Korea Zinc says it is turning to Washington for support.

The co-founders of Korea Zinc were friends turned business partners from the same province in what is now North Korea. The company’s name in Korean, Koryo Ayeon, uses the centuries-old name of the Korean state. Korea Zinc produces raw materials for cars, electric vehicle batteries and semiconductors.

Kim, who is worth around $10 billion and moonlights as a fiction writer, sits atop his eponymous partners MBK. He and his Seoul-based private equity firm have long been praised locally for their deal-making prowess in South Korea. It owns several Chinese companies and has a small contingent of Chinese investors. MBK, emphasizing its strong ties and investments in both Korea and Japan, promised not to sell Korea Zinc to the Chinese.

This commitment did not soften the rhetoric of Korea Zinc and its allies. They labeled MBK as a corporate raider interested only in profits. If MBK took control, a company official said this week, Korea Zinc’s core technology would leak abroad and South Korea’s industrial competitiveness would collapse. The company’s technical director and senior engineers threatened to resign if MBK won.

“MBK holds the keys if it takes control,” said Kim Ki-june, executive vice president of Korea Zinc. “They can hire whoever they want.”

The showdown around Korea Zinc shows how the sheer potential for technology to move to Beijing could complicate deals in once-sleepy corners of the global supply chain. Despite Western efforts, China’s mineral advantage has only grown, in everything from nickel to cobalt to lithium.

China’s mineral dominance

Korea Zinc would not say whether it had managed to commit U.S. aid. In Wednesday’s disclosure, the company said it has submitted an application to the South Korean government for “national core technology” status for some of its technologies. Processing takes approximately 15 days. If a foreign buyer ever comes along, government approval will be required. for Korea Zinc.

Western officials worry about Beijing’s ability to disrupt supply chains or create an unlevel playing field by flooding the market with supplies.

There’s only so much Washington can do as China’s buying spree spreads from Africa to Argentina while there are 50 entries on the U.S. list of critical minerals and “it’s impossible to protect them all,” said Hayley Channer, United’s director of economic security States Studies Center at the University of Sydney, Australia “One day it could be Korea Zinc, the next it could be any number of mining companies around the world.”

Two years ago, the United States and a number of allies, including South Korea, agreed to cooperate on efforts to diversify key mineral supply chains. The coalition recently formed an alliance with financiers to better coordinate investments.

“The United States is taking this very seriously as it has recognized the risks of over-reliance on China for critical and strategic minerals,” said Ian Satchwell, who advises governments, businesses and other organizations on minerals and energy policy.

Zinc is one of the minerals considered critical by U.S. company Korea Zinc and its sister subsidiary accounted for 8.5% of global refined zinc production last year, according to research and consulting firm Wood Mackenzie. Refineries in China accounted for 49%.

Seoul-based Korea Zinc also processes copper, nickel and other metals and produces sulfuric acid, which is used by semiconductor makers to clean wafers. He owns scrap metal plants in the USA

Two families under one roof

Founded in 1974, Korea Zinc was added to the Young Poong conglomerate. The co-founders, who lived in South Korea before the Korean War from 1950 to 1953, both grew up in what is now part of North Korea. The ownership split, unique among South Korean conglomerates, was described as: “Two families under one roof.”

However, in recent years there has been a rift between Choi, the third-generation president of Korea Zinc, and Chang Hyung-jin, the son of founder Young Poong. The dispute concerned ownership control and power in the management board. Chang and MBK have questioned some of Korea Zinc’s investments, corporate governance and profitability since Choi became president in 2019.

Young Poong, Chang and his family are Korea Zinc’s largest shareholders with a combined stake of approximately 33%. However, board power and management control largely rested with Choi.

To change that, Chang found a willing partner in MBK, one of Asia’s largest private equity firms with more than $30 billion in assets under management. Together, they would seek to amass up to 47.7% of Korea Zinc – enough clout to secure the voting rights needed for an eventual management shake-up.

On September 13, MBK and Young Poong announced a $1.5 billion tender offer, open to any Korea Zinc shareholder willing to sell. Since then, shares of Korea Zinc, which has a market capitalization of about $11 billion, have risen almost 30%.

That prompted MBK to raise its per-share offer to about $1.7 billion on Thursday. The deadline for selling shares is October 4. Regardless of the offer, Young Poong will share its final total stake with MBK, which will retain one additional share. MBK will take over management control if they succeed.

Controversy in China

The deal sparked an unusual reaction from MBK and Michael ByungJu Kim, who was praised by local media for his “Midas touch” in the South Korean M&A industry. Kim, 60, who was not made available for an interview by MBK, founded the private equity firm in 2005 after management positions in Asia at Goldman Sachs and Carlyle.

Kim was born in South Korea but immigrated to the United States as a teenager. A graduate of Harvard Business School, a Korean-American billionaire whose interests go far beyond finance. He owns a rare 18th century Bible and enjoys reading King Lear. He wrote a semi-autobiographical novel in the US titled “Offerings”, which became a bestseller in the US in 2020 and will soon become a Hollywood film.

Kim was also a supporter of the Chinese promise. In his annual letter to investors, Kim questioned others who had withdrawn from the country. “We believe in China in the medium and long term,” he wrote. “For now, we are mainly interested in Korea and Japan. But China will come back.”

Korea Zinc argued that there was no way to forcibly stop MBK from selling to China and that the risks associated with transferring critical technology were high. The mayor of Ulsan, where Korea Zinc operates, recently called on each of the city’s 1.2 million residents to buy shares to prevent the company from being sold to a Chinese company in the future.

Throughout the company’s existence, MBK has never sold a Korean company to a Chinese buyer, said Kim Kwang-il, the MBK partner overseeing the Korea Zinc transaction. Chinese entities constitute less than 5% of all MBK investors. MBK expects to maintain Korea Zinc’s position for approximately ten years.

Young Poong and MBK claim that some of Korea Zinc’s investments under Choi were made without board approval, raising corporate governance concerns. For example, a private equity firm run by Choi’s close friend attracted funding from Korea Zinc and focused on industries other than mining. Korea Zinc said major investments went through the proper channels.

“Transferring key technologies to Chinese companies would harm Korea Zinc,” Kim Kwang-il said. “Private capital is about increasing the value of the company you are acquiring and doing something contrary to that is unimaginable.”