KT&G faces pressure from private equity funds for major changes

KT&G building in Samseong-dong, southern Seoul [YONHAP]

KT&G is being targeted by private equity funds that are demanding higher shareholder returns and the change of board directors. The tension has escalated ahead of the upcoming general shareholders meeting scheduled for later this month.

The tobacco company and the private equity fund have been going back and forth regarding matters such as buying back the company’s own shares to then cancel them, raising the dividend ratio and replacing some of the board members with new independent directors recommended by Flashlight Capital Partners (FCP), a private equity fund based in Singapore.

FCP and another private equity fund Anda Asset Management hold about a 1.5 percent stake of KT&G.

Each party is attempting to earn as many as votes from shareholders before the meeting takes place at the KT&G Human Resources Development Center in Daejeon on March 28.

FCP says that KT&G has “too much” disposable cash worth 6 trillion won ($4.6 billion). The private equity fund claims the tobacco company is financially stable enough to raise the dividend payout to 10,000 won per share, or an aggregate dividend of 1.2 trillion won, and spend additional 1.2 trillion won to buy back and cancel KT&G’s own stocks.

FCP's requested dividend payout is 108.33 percent higher than the company's dividend payout of 4,800 won per share in 2022.

The private equity fund also demanded quarterly dividend returns to the shareholders.

FCP recommended two candidates to the board — former CEO of LG Household & Health Care Cha Seok-yong and former Prudential Life Insurance CEO Hwang Ou-jin.

FCP will host an online conference about its activist shareholder actions on Tuesday 4 p.m.

Anda Asset Management, another private equity fund, also requested to raise the dividend payout to 7,870 won per share. It also requested that the number of board members be increased from six to eight.

Anda Asset Management announced Friday that Institutional Shareholder Services (ISS) supports its decision to increase the number of board members and also suggested it oppose board candidates recommended by KT&G.

KT&G responded saying that it will send a letter of rebuttal to ISS and plans to actively communicate with shareholders that their activist funds’ “drastic and short-term requests” may hurt the future growth potential of the company.

Glass Lewis, an American proxy advisory, sided with KT&G and approved all of the proposals made by the company.

KT&G has been firm that requests from shareholder activists are “excessive,” considering the company’s growth plan of investing a total of 3.9 trillion won of its capital expenditure over the next five years, as announced during an event for domestic and global investors in January.

The company has suggested a dividend payout of 5,000 won per share.

KT&G’s recommended board of directors are former Chief Financial Officer of Shinhan Financial Group Kim Myung-chul, business administration Professor Ko Yoon-sung of Hankuk University of Foreign Studies and former Homeplus CEO Lim Il-soon.

Before, shareholder activist funds, fronted by FCP, requested KT&G spin off its ginseng business to recover from falling corporate value.

Anda Assets filed for an injunction to the court to demand the tobacco company to bring the matter to vote for the upcoming shareholders meeting. However, Daejeon District Court dismissed the injunction on Monday, stating that separating the ginseng business is "a matter which the company does not have the power to put into action."

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]