Holding Companies HMG Ownership Restructuring: Share Swap to Come First, Followed by Merger

Holding Companies HMG ownership restructuring: Share swap to come first, followed by merger Overweight (Maintain) HMG scraps spinoff/merger plan; problem lies in giving the market the wrong incentives Industry Report Hyundai Motor Group (HMG) announced that it has scrapped the proposed deal th May 23, 2018 (announced on March 28 ) to spin off Hyundai Mobis’ module and after-service (A/S) businesses and merge them with Hyundai Glovis, given the uncertainty surrounding approval by Hyundai Mobis’ shareholders (a shareholders meeting had been scheduled for May 29 th ). The group said it would instead bring forward a new proposal. Mirae Asset Daewoo Co., Ltd. Domestic and foreign proxy advisers had all recommended voting against the deal, [Holding Companies/IT Services ] arguing that: 1) it undervalued Hyundai Mobis’ spun-off units , making the merger ratio unfavorable to Mobis shareholders; and that 2) the merger lacked justification. Dae -ro Jeong +822 -3774 -1634 In our previous note ( How to navigate HMG’s ownership restructuring issues , dated [email protected] April 25 th ), we noted that the main issue complicating HMG’s restructuring plan was Su Yeon Lee the long-short trade dynamics created by the perceived interests of major +822 -3774 -7162 shareholders in their planned stock transactions/swaps with group affiliates ( swap [email protected] between merged Glovis shares held by major shareholders and surviving Mobis shares held by Kia Motors, Hyundai Steel, and merged Glovis), rather than the controversy over the fairness of the spinoff/merger ratio. Investors recognized that the higher the share price of the merged Glovis and the lower the share price of the surviving Mobis, the more favorable it would be for the major shareholders; most built their positions accordingly, resulting in pressure on Hyundai Mobis’ share price. This, in turn, gave rise to doubts and frustration am ong Hyundai Mobis shareholders over the restructuring plan, reducing the chances of the deal being approved. As long as such long-short dynamics are at play, we doubt a new merger ratio more favorable to Mobis shareholders would make a difference, in terms of Mobis’ share price or the prospect of shareholders approving the deal. Several civic groups have also pointed out that the dynamics of major shareholders’ interests can potentially encourage the overvaluation of the surviving entity and undervaluation of the spun-off entity. While the plan has been called off, we see several important takeaways regarding the direction of HMG’s ownership reform. First, the group needs to address issues surrounding circular shareholdings and related-party transactions through its ownership restructuring . Second, the group prefers establishing a de facto holding company (rather than converting to an outright holding company structure) and has tapped Hyundai Mobis for that role. Third, the major shareholders are looking to acquire additional shares in Hyundai Mobis using their Hyundai Glovis stake. New restructuring plan: Merger to come after Mobis split and share swap We believe HMG will resume its push for restructuring as soon as it can, given i ts need for restructuring and the uncertainty surrounding policy changes. We think the group will keep the broader outline of the original proposal, as it has already shared its medium/long-term business goals, vision, and shareholder return policies with the market based on that plan. Considering HMG’s ownership reform direction, the logic behind proxy advisers ’ opposition, and the need to overcome the long-short trade dynamics, we believe the group will renew its restructuring and restore trust with shareholders and the market by taking the following three steps: Step 1: Split Hyundai Mobis into a controlling company (surviving) and a module and A/S company (newly established) and list them separately. ►This would allow the market to evaluate the sp lit ratio set by the company and price the entities accordingly, ensuring fairness in subsequent transactions. May 23, 2018 Holding Companies Step 2: Major shareholders swap their shares in Hyundai Glovis (30%) and spun-off Mobis (7%) with surviving Mobis shares (16.9%) held by Kia. In this case, major shareholders would need to separately raise funds to pay for the shortfall and capital gains taxes. They could also acquire surviving Mobis shares (6.3%) owned by Hyundai Steel and Hyundai Glovis. ►This would address issues regarding circular shareholding and related-party transactions. Conducting a share swap prior to the merger of spun-off Mobis and Hyundai Glovis would remove any controversy surrounding the interests of major shareholders. That said, this would be a costlier plan for major shareholders than the original proposal. * Pursuing the merger before the share swap would once again raise questions about the merger timing and ratio being in the interest of major shareholders, obscuring the prospects of shareholder approval. Step 3: Kia gains a 23.8% stake in spun-off Mobis and a 30% stake in Glovis. HMG secures shareholder approval to seek a merger between spun-off Mobis and Glovis. ►This would enable the group to push forward with the merger without it being tied to the interests of major shareholders, limiting the possibility of controversy arising over the merger ratio. For Kia and its shareholders, an increase in enterprise value due to the merger would justify the swap of surviving Mobis shares. Mirae Asset Daewoo Research 2 May 23, 2018 Holding Companies (Current) HMG’s ownership structure: Need to resolve cross-shareholding and related-party transaction issues (Step 1) Re-listing of Hyundai Mobis after split-off (Step 2&3 ) Major shareholders to swap their shares in Hyundai Glovis and spun-off Mobis with surviving Mobis shares held by Kia Merger of surviving Mobis and Hyundai Glovis Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 May 23, 2018 Holding Companies HMG scraps spinoff/merger plan HMG announced that it has scrapped the proposed deal (announced on March 28 th ) to spin off Hyundai Mobis’ module and after-service (A/S) businesses and merge them with Hyundai Glovis, given the uncertainty surrounding approval by Hyundai Mobis’ shareholders (shareholders meeting had been scheduled for May 29th ). The group said it would instead bring forward a new proposal. Domestic and foreign proxy advisers had all recommended voting against the deal, arguing that 1) it undervalued Hyundai Mobis’ spun-off units, making the merger ratio unfavorable to Mobis shareholders, and that 2) the merger lacked justification. Table 1. HMG scraps spinoff/merger plan Date Merger agreement 3/28/2018 Book closure 4/12 Start 4/13 Book closure End 4/20 Notice of shareholder intent to Start 5/14 exercise appraisal rights End 5/28 Spinoff/merger plan scrapped 5/21 Shareholders’ meeting 5/29 Source: DART, Mirae Asset Daewoo Research Table 2. Domestic/overseas proxy advisers’ reasons for opposition Advisor Opinion Reasoning ㆍThe merger ratio calculation methodology and HMG’s rationale for spin-off/merger are not convincing ㆍThe value of the module and after-sales service businesses was underestimated, which should be unfavorable for Hyundai Mobis shareholders in calculating a merger ratio 1 Sustinvest Opposition ㆍHyundai Mobis’ recently announced medium-to-long-term vision was filled with positive projections and targets without any valid reasons to justify the rosy growth outlook ㆍThe spin-off/merger plan is not expected to improve HMG’s ownership structure, and is unlikely to generate synergies ㆍAlthough the terms of the transactions are fully compliant with the governing law of Korea, the deal will likely leave Mobis shareholders short-changed ㆍThe governance reform plan of HMG is based on a suspicious business logic and insufficient valuation 2 Glass Lewis Opposition ㆍThe group’s rationale for the spin-off of Hyundai Mobis’ profitable businesses, which would then be merged with logistics firm Hyundai Glovis, is not convincing ㆍThe spin-off/merger deal will be advantageous only for Hyundai Glovis shareholders ㆍThe institute recommended member asset management firms to vote against the spin -off/merger of Hyundai Mobis, citing procedural issues ㆍThe fair value of Hyundai Mobis’ spun-off unit has not been assessed, as it has been regarded as an unlisted firm; in order to enhance the interests of its shareholders, the spun-off unit needs to be listed first (for fair valuation) before being Daishin Economic 3 Opposition merged with Hyundai Glovis Research Institute ㆍIf the listing of the spun-off unit precedes the merger of spun-off Mobis and Hyundai Glovis, the status of shareholders of spun-off Mobis will remain unchanged, and the controversy surrounding the fairness of the spinoff/merger ratio and the interests of major shareholders will be removed Institutional ㆍThe merger lacks justification and the merger ratio is unfavorable to Mobis shareholders 4 Opposition Shareholder Service ㆍThere are uncertainties over major shareholders’ planned stock transactions/swaps with group affiliates ㆍAlthough Hyundai Mobis’ rationale is justifiable, the spin-off of non-overseas businesses is not in line with the company’s rationale; it is uncertain whether the spun-off entities of Hyundai Mobis will generate synergy with Hyundai Glovis Korea Corporate ㆍEven if the spin-off/merger ratio is fairly calculated, the deal is not expected to enhance shareholder, as well as corporate, 5 Opposition Governance Service value ㆍHyundai Mobis’ long-term ownership restructuring

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