LG announced late last year that it plans to spin off a newly created holding company comprised of the Company’s direct and indirect holdings in LG Hausys, LG MMA, Silicon Works, LG International and Pantos (the “Spin-Off”). Whitebox thoroughly examined the strategic and financial impacts of the proposed Spin-Off. We concluded that the transaction weakens LG and runs counter to shareholders’ best interests.
It is important to underscore that Whitebox is a long-term investor in LG. We believe LG’s Board of Directors has an exciting opportunity to strengthen the Company’s market position and future prospects by beginning to adopt investor feedback and focusing on value-creating actions. If LG continues to disregard shareholder input and prioritize family succession issues, however, we fear it will become a perpetual laggard among South Korea’s conglomerates when it comes to performance and corporate governance.
Below are Whitebox’s top three concerns about the Spin-Off that shareholders will vote on at the March 26, 2021 General Meeting. Whitebox intends to vote AGAINST the Spin-Off.
- We believe the Spin-Off would exacerbate LG’s most pressing issue, which is the unprecedented discount at which the Company’s shares trade.
- Despite the fact that most holding companies (particularly in South Korea) do not trade anywhere near their net asset value (“NAV”), we believe that LG’s actions have only exacerbated the Company’s discount to NAV. We estimate that LG is currently trading at a 69% discount to the sum of its parts – which represents its widest level in more than ten years – while the average discount to NAV of the nine largest Korean conglomerates is 59%. Despite a 33% increase in value of LG’s net assets since January 2018, the Company’s shareholders have seen a 12% loss in the value of their holdings with the market value of LG decreasing from KRW16 trillion to KRW14 trillion1.
- We believe two key factors drive discount levels: 1) the ability to optimize shareholder returns by generating cash beyond inherent structural costs, and 2) minority investors need to trust that management’s interests are aligned with their own.
- The announcement of the Spin-Off exacerbated concerns regarding management’s misalignment with shareholders. At a time when the discount had reached unprecedented levels, the number one priority for shareholders was for leadership to stem the value destruction, but management seemed preoccupied with personal succession issues. Though analysts and Korean media attributed the Spin-Off to succession planning, LG’s official announcement failed to adequately dispel this widely held belief.
- We believe the decision to spin off these assets demonstrates that LG’s corporate governance practices fail to represent the interests of shareholders and are not consistent with global best practices.
- LG ranks as a corporate governance laggard when compared to global best practices and even domestic competitors. At a time when ESG policies are a priority for investors globally and the corporate governance of chaebols is in focus, we question why the Board has unanimously approved a sub-optimal, succession-driven restructuring plan, especially one lacking a clear strategic or financial rationale.
- It is truly astounding that LG’s corporate governance practices compare unfavorably to Samsung C&T Corporation (“SCT”) – whose Vice-Chairman JY Lee was just sentenced to two and a half years in prison for bribery. In terms of board composition, SCT separates its Chairman and CEO, has both female and non-Korean non-executive directors, and has established Related Party Transaction, Compensation and Governance Committees (comprised of outside directors only). In contrast, LG has established only two board committees, with only the Audit Committee comprised solely of outside directors.
- We believe that the governance procedures currently in place at LG are insufficient and must be urgently addressed by truly independent directors who are committed to ensuring that all shareholders are treated equally and that the business is optimally positioned. We continue to believe that LG has a tremendous opportunity to improve its governance profile and lead the way in South Korea for its peers.
- We believe the Spin-Off fails to create value for minority shareholders or LG.
- Spin-offs create value for shareholders when the spun-off assets are worth more as independent entities than as part of a larger conglomerate or when the surviving company is sufficiently streamlined through the transaction (which is deemed as value-generating by supportive investors). This transaction does not have the hallmarks of a viable and well-supported spin.
- LG proposed that a group of disparate businesses drawn from all three of the Company’s segments would be spun off into a much smaller, less liquid holding company (“NewCo”), effectively creating a microcosm of LG itself. NewCo will be a holding company with 75% of its assets comprised of stakes in unrelated publicly listed companies. The remaining asset value will be split between an unlisted business and net cash. We cannot see a distinct competitive strength, strategy, industry position or compelling market opportunity for NewCo.
- For LG, although the Spin-Off would divest of some non-strategic assets, it does so while sacrificing 9% of LG’s cash balance, 17% of its dividend revenue and 3.6% of royalty revenue. This means that the ability for LG to create value for shareholders at the holding company level in the future is compromised without any sort of compensation.
1. As of November 26, 2020, the day LG announced the Spin-Off.