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[News Analysis] Overcoming Elliott hurdle, Hyundai heir tightens grip over W220tr empire

In a crushing victory over US hedge fund, Chung cements his leadership -- but is a bigger battle ahead?

Tension ran high early Friday morning, just before Hyundai Motor’s annual general shareholders meeting at the carmaker’s headquarters in Yangjae, southern Seoul, and it showed on the faces of the executives.

Highlighted in the media weeks earlier, the second battle between the South Korean auto giant and the US hedge fund Elliott was a must-win for Hyundai Motor, which had already suffered big as a result of an attack by Elliott a year earlier.

Then, the US activist fund blocked a 10 trillion won merger between Hyundai’s affiliates. Another defeat might have dealt a serious blow to the world’s fifth-largest carmaker, not only exposing its vulnerability to foreign capital but also presenting a huge delay in the planned corporate restructuring that is likely to pave the way for a transfer of leadership at the 51-year-old carmaker to its chairman-in-waiting, Chung Eui-sun.

Hyundai Motor`s annual general shareholders meeting in Seoul on Friday. (Yonhap)
Hyundai Motor`s annual general shareholders meeting in Seoul on Friday. (Yonhap)

In a proxy vote, Hyundai won shareholders’ support for its plan to offer 1.1 trillion won in dividends to investors this year, with 86 percent in favor and 14 percent standing by Elliott’s counterproposal of 8.3 trillion won. Shareholders also approved the company’s recommended additions to its board of directors, which included Chung as internal director, over Elliott’s external candidates.

The outcome was widely viewed as a crushing victory for Hyundai Motor over Elliott, the world’s largest hedge fund, known for its hardcore shareholder activism.

An odd but familiar sense of patriotism toward the carmaker, which has been at the center of Korea’s economic miracle, prevailed, with shareholders saying they were confident in the recent changes at the company and would like to see it invest more in future technologies instead of spending big on dividends.

Even though a representative of Elliott stressed that the hedge fund was not trying to fight Hyundai but to modernize its capital management, a shareholder compared Elliott’s proposal to killing the goose that lays the golden eggs.

“It was a humiliating defeat for Elliott,” said Bruce Lee, founder of Zebra Investment in Seoul, who has been tracking the hedge fund’s investments over the past 10 years. “Elliott might now consider seeking a compromise before it pulls off its investment.”
Motor Group Executive Vice Chairman Chung Eui-sun,left. (Hyundai Mobis)
Motor Group Executive Vice Chairman Chung Eui-sun,left. (Hyundai Mobis)

Through its affiliates, the US hedge fund holds stakes of about 3 percent in Hyundai Motor and 2.6 percent in Hyundai Mobis, the carmaker’s parts maker.

“Investment horizon by a hedge fund that takes action over a change in governance structure usually lasts three years. For Elliott’s Hyundai case, the due date is almost coming,” said Lee.

Market observers have said Elliott appears anxious about the possibility of losing its money.

Hyundai Motor’s share prices have plunged around 25 percent from a year ago, when Elliott declared war on the carmaker. While initiating its “Accelerate Hyundai” project, Elliott said last year it was a major shareholder in the carmaker and Hyundai Mobis and was concerned about its future as well as its “excessive cash.”

The victory on Friday will no doubt help the heir cement his leadership over the 220 trillion won empire and empower him as he attempts to revamp the auto giant’s governance structure so that he can gain a high enough stake to defend the company from foreign intervention. The executive vice chairman holds a 23.29 percent stake in logistics affiliate Glovis, but none in Mobis, which currently controls Hyundai Motor with 21.43 percent of shares.

But Park Ju-gun of local corporate tracker CEO Score said it is too early for Hyundai Motor to break out the Champagne.

“Elliott should have known that it was a losing game,” he said. “It wanted to let other shareholders know that it was leading a campaign to push the carmaker for more shareholder-friendly policies, provide more returns to investors and bring them to their sides before a bigger battle begins.”

The proportion of shareholders who sided with Elliott, 14 percent, is not an insignificant number, he said. “If it gets 34 percent support next time, it could block Hyundai’s corporate governance revamp plan again,” Park said.

While experts remain divided over Elliott’s future plans after its defeat on Friday, they say there’s no doubt that Hyundai is in a hurry for a second push to revamp its governance structure, citing pressure from the government, the plunging value of its shares, and group Chairman Chung Mong-koo’s deteriorating health. The lower share prices mean the heir will get a lower tax bill, Lee of Zebra Investment said.

By Cho Chung-un (