Yesterday, companies controlled by the patriarch of South Korea’s second-largest family-run conglomerate won an auction for a plot of prime real estate in Seoul with a 10.55 trillion won ($10 billion) bid, in what one researcher estimated to be the biggest-ever such deal worldwide. Hyundai’s rationale for offering triple the property’s assessed value is that the company will move its headquarters there and develop the area by building a hotel, convention center and a car museum.
Investors balked. Within hours of the announcement, Hyundai and two affiliates lost a combined 8.41 trillion won in market value as the deal became a
sobering sign that President Park Geun Hye’s scrutiny of corporate dynasties is failing to loosen their grip over the empires that dominate the economy. The risks associated with large family businesses, known as the chaebol, are so entrenched in investor mindsets that there’s an expression for why local stocks consistently trade at lower multiples than global peers. It’s called the “Korea Discount.”
Hyundai Motor Co.’s Billionaire Chairman Chung Mong Koo.
Big Drops
Asked to comment on concerns over the price, Hyundai Motor said in a statement that the offer was appropriate given factors such as the property’s future value, the company’s strategic plans and the need to create a “global control tower.”The three Chung-controlled companies identified as being involved in the bid -- Hyundai Motor, Kia Motors Corp. (000270) and parts maker Hyundai Mobis Co. (012330) -- were the biggest drags on the benchmark Kospi index yesterday. Hyundai Motor fell 9.2 percent and Mobis tumbled 7.9 percent, their biggest declines in three years. Kia’s 7.8 percent drop was its steepest since February 2009. Hyundai Motor and Mobis extended declines today, while Kia recouped some of its losses in Seoul trading.
Korea Discount
For Hyundai and its smaller affiliate Kia, the rout pushed down their shares to the point that they’re the only global automakers to be valued at under six times estimated earnings, according to data compiled by Bloomberg. By comparison, No. 1 carmaker Toyota Motor Corp. (7203) trades at nine times estimated profits, in line with the industry median, while Volkswagen AG and General Motors Co. (GM) trade at about seven times future earnings.It’s not just Hyundai that has low valuations. Samsung Electronics Co. (005930), Korea’s largest company and the crown jewel of the nation’s top chaebol, trades at below eight times estimated earnings. By comparison, rival Apple Inc. (AAPL)’s shares have an estimated price-to-earnings ratio of about 14.
Still, rarely can one find a company that’s higher rated than Hyundai among professionals who recommend stocks. Of the 50 analysts that cover the Seoul-based carmaker, 94 percent had a buy rating on the stock before yesterday’s announcement, the highest proportion of any carmaker tracked by Bloomberg. And that’s just average for Hyundai since 2010.
Buy, Buy
In that period, no matter the situation -- be it the stock’s 37 percent slide over a three-month period in 2011, a year-long 31 percent decline that began in April 2012, or its 26 percent slump since Oct. 16 through yesterday -- the proportion of buys on Hyundai Motor had never dipped below 87 percent and sometimes went as high as 100 percent, according to data compiled by Bloomberg.Until the land deal. Since the disclosure, analysts at Citigroup Inc. (C), HSBC Holdings Plc, JPMorgan Chase & Co. and Nomura Holdings Inc. cut their investment ratings on Hyundai.
The price Hyundai is paying stands out. At almost $130,000 per square meter, it’s more than triple the most expensive commercial block deal, on a square-meter basis, in Hong Kong: Agricultural Bank of China Ltd.’s 2012 purchase of an office tower on the outskirts of the Central business district.
The $10 billion being offered also exceeds Hyundai Motor’s entire 2013 earnings and is triple the carmaker’s capital expenditure plans for this year.
Expensive Deal
The transaction would be the world’s biggest single asset real estate deal, beating the $5.4 billion purchase of Peter Cooper Village and Stuyvesant Town in New York by Tishman Speyer Properties LP and BlackRock Realty LP in 2006, according to Real Capital Analytics Inc., which began compiling data in 2000.“I think everyone feels that the deal was overpriced,” said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd., which oversees $10 billion. “It’s a concern that money is flowing to non-business related activities.”
Of 13 bidders for the site, only the Hyundai-led group and Samsung made qualifying offers, according to Kepco. While Samsung declined to comment on its losing bid, the Kyunghyang newspaper reported that its offer was between 5 trillion won and 6 trillion won.
The land, located in the central Gangnam district and owned by state-run Korea Electric Corp. (015760), was put on the market in July ahead of the relocation of Kepco to the south of the country as part of a government regional development plan.
Prime Property
The area near the Kepco site is prime real estate. Adjacent is the COEX Mall, described by the country’s tourism board as Asia’s largest underground shopping center. To the east, Lotte Group is spending 3.5 trillion won to develop a 123-story building, hotel and shopping mall complex. The tower, which will be the capital’s tallest, is scheduled to be completed by the end of 2016, while the mall is awaiting Seoul government approval to open, according to Lotte.The scale of Hyundai’s investment also disappointed investors who had been waiting for higher dividends, optimism triggered recently when the government announced plans to levy a 10 percent punitive tax on corporate cash hoarders.
“This is like throwing cold water at investors and what Hyundai is basically saying is that they’d rather buy real estate than pay dividends,” said Bruce Lee, chief executive officer at Zebra Investment Management in Seoul. “This deal didn’t just discourage Hyundai investors but put Korean companies and their corporate governance problems in the spotlight.”
Hyundai preferred shares fell for a second day, dropping 7.7 percent to close at their lowest level since Feb. 6.
Pressure Building
Not everyone expressed concerns. Standard & Poor’s said yesterday that its long-term credit ratings on Hyundai, Kia and Mobis wouldn’t be affected by the announcement. Moody’s Investors Service affirmed its ratings on the trio today.“Hyundai Motor group’s strong balance sheets -- with each of the three companies’ significant cash holdings and robust free cash flow-generating abilities -- will enable it to fund this sizable transaction without any material stress on their financial profiles,” Chris Park, a Hong Kong-based analyst at Moody’s, said in a statement.
Hyundai’s move comes at a time when President Park’s administration is seeking to put pressure on chaebol groups to unravel cross shareholdings and simplify their ownership structures through holding companies. The government is offering companies tax incentives to do so and banning new cross shareholdings.
Chung, 76, the eldest living son of the late founder of Hyundai, isn’t the only one in his family to trigger corporate governance concerns recently. His cousin Chung Mong Won, head of the Halla Group, saw shares of flagship Mando Corp. (060980) tumble 29 percent over five days last year after the auto-parts maker agreed to bail out a construction affiliate.
The move outraged investors so much that the nation’s $400 billion National Pension Service made the rare move of opposing a term extension for a Korean CEO at Mando’s annual general meeting in March. While Shin Sa Hyeon got enough votes to extend his term, he didn’t show up for the AGM.
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