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Major shareholder calls Hyundai bid ‘an embarrassment’

Published: 03 Nov. 2014, 23:24

Skagen Funds, the biggest holder of Hyundai Motor preferred shares, is pushing Korea’s largest automaker to improve corporate governance after a real estate purchase for three times the property’s assessed value sparked a rout in the stock.

The Norwegian fund firm met with Hyundai’s management after companies controlled by Korea’s second-largest family-run conglomerate agreed to the $10 billion purchase for a new headquarters, hotel, convention center and car museum in Seoul. The bigger of Hyundai’s two preferred shares has lost 21 percent since the deal was announced on Sept. 18, while foreign investors sold a net $370 million of Hyundai common shares.

The deal is “an embarrassment to Hyundai Motor’s management team,” Knut Gezelius, a money manager at Skagen, said from Norway on Friday. “We’ve made it very clear that we disagree with the decision and we expect to see much better corporate governance and use of shareholder money going forward.”

Hyundai’s purchase has damped optimism that Korean companies will improve shareholder returns after the nation’s Finance Ministry said in July it would use tax policy to encourage higher dividends, according to Gezelius. Hyundai trades at the lowest valuation among the world’s 10 largest automakers, while the benchmark Kospi index’s 1.5 percent dividend yield is the smallest among global equity indexes tracked by Bloomberg.

While Hyundai Motor is closely monitoring investors’ reactions following the land deal, the Seoul-based automaker is considering bigger dividends as well as interim dividends beginning next year, the company said in an email response. The preferred shares have risen 10 percent since Oct. 23, when Hyundai announced plans for possible interim dividends from next year and predicted improved earnings for the current quarter.

“Raising the dividend is a very small and encouraging sign, but we haven’t seen the actual action yet, so we’re waiting for that,” Gezelius said.

Skagen held at least 5.7 million of Hyundai’s two classes of preferred shares at the end of September, a stake valued at the equivalent of about $668 million at the closing price last week. Preferred shares pay a higher dividend than common shares and trade at a discount, though they don’t include voting rights.

Hyundai reported a 29 percent drop in third-quarter profit, missing analyst estimates after a stronger won and worker strikes undercut earnings. The won has gained 5.7 percent against the Japanese yen in the past three months, eroding the competitiveness of Korean exporters.

The automaker must focus on generating higher returns to revive investor confidence, said Gezelius. He contrasted Hyundai’s land deal with the decision last month by Samsung Electronics, Korea’s biggest listed company, to invest $15 billion in a new semiconductor chip plant.

“One company spends money on building an auto theme park and another company spends money on making solid investments generating high returns,” Gezelius said. “It would be more likely that we would redeploy money into companies that are making better use of shareholder funds.”

Bloomberg