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KT Vulnerable to Foreign Hostile Takeover?
During last week's parliamentary inspection, a lawmaker claimed Korea's foremost fixedline telecom operator KT is under the threat of a hostile takeover.
Rep. Suh Hye-suk from the ruling Uri Party made the point based on the logic that foreign shareholders retain more than 60 percent of voting rights for KT.
"Although foreigners hold less than 48 percent of KT stocks, they explain up to 63.21 percent of voting rights due to KT's treasury stocks that does not have voting rights," Suh argued.
Subsequently, Suh insisted the nation is required to revamp the law or introduce such systems as golden share and poison bill to protect KT's management from potential foreign raiders.
However, the government and KT points out that the possibility of foreign players' maneuver like attempts to carry out hostile mergers and acquisitions (M&A) is practically negligible because of existing protective arrangements.
KT's Ownership Structure
KT, formerly Korea Telecom, is the country's predominant operator of fixed-line telephone services and the biggest carrier of the high-speed Internet offerings.
As of the end of last month, KT explained 93.3 percent of Korea's 23 million subscribers for landline telephony services and carved out 51.8 percent of the broadband market of 12 million users.
Currently, overseas investors have 47.31 percent of the telecom giant's 284.8 million stocks, just shy of the 49-percent ceiling stipulated by Korea's relevant law and regulations.
The company's top three shareholders are all U.S.-headquartered investment funds.
Brandes Investment Partners is the single-biggest stockholder at 7.85 percent followed by Templeton Global Advisor at 7.78 percent and Capital Research & Management Company at 7.12 percent.
However, all the foreign player's compound voting rights amount to 63.21 percent as KT itself maintains 25.2 percent of holdings that cannot be used to vote.
The former state monopoly, which became fully privatized in 2002, started buying back its shares since the cited year. The operator retired some of them while holding most of them for a later sale.
"Things are more problematic considering many Korean stakeholders do not participate in KT shareholder's meeting while foreign players are typically present," Suh said.
She added that an absence of just 6-percent of Korean shareholders will give foreign players 67.24 percent of voting rights, high enough to dismiss management and determine the change of KT articles, breakup of the firm or mergers with other outfits.
"We can witness the hardships of companies controlled by foreign shareholders in Hanaro Telecom, which abandoned a WiBro license due to short-term payback-sensitive foreign stakeholders," Suh said.
She means Hanaro, the runnerup landline carrier, gave up a WiBro license early this year as foreign investors were afraid of spending too much on the Internet- on-the-go technology, which will not have a high return in the short term.
WiBro is a made-in-Korea technique that enables people on the road to hook up to the Internet at the speed of current fixed-line broadband.
U.S.-based funds of NewBridge Capital and American International Group are the top shareholder of Hanaro at 39.6 percent of holding.
Under such rationale, Suh recommended several safeguard measures like sales of treasury stocks, introduction of poison pill or golden share and overhaul of the relevant law.
Poison pill refers to a format aimed at avoiding a hostile takeover bid through issuing a large number of new shares to existing shareholders to check a potential acquirer.
Golden share, adopted by Britain in the 1980s when it privatized state corporations, renders the government the right of decisive vote, thus to veto all other shares.
Yet, as Suh admitted the country should change all the associated laws to phase in the abovementioned two formulas and they might trigger disputes both locally and globally.
In this climate, Suh's suggestion is sales of KT treasury stocks to reliable domestic long-term investors like pension funds.
"Then, the funds can play the role of the white knight when foreign raiders try to victimize KT because the voting rights of the stock will be resurrected in the hands of non-KT investors," Suh said.
Another option is to change the benchmark of the 49-percent rule from current stake holding to the voting rights.
"We need to understand the spirit of the 49-percent cap. It is outright geared toward preventing foreigners from accounting for more than half of voting rights. Then why not we change its standard to meet its original intention," Suh asked.
Government, KT Deny Hostile M&A
The Ministry of Information and Communication (MIC), which is in charge of overseeing the telecom market, flatly downplays the probability of hostile takeover attempt against KT.
"We are armed with double firewalls against foreign bid to take over KT, the quantitative 49-percent rule and the qualitative one ? examination by the government into any M&A attempt," MIC director Kim Kyong-man said.
Under the nation's Electricity- Telecom Business Act, the MIC can review any attempts from foreign shareholders to command the management of major telecom companies like KT.
When the ministry judges such bids are against the public interest, it can restrict voting rights of the foreign shareholders or stock deals involving them.
The clause, which was added last year, applies to all Korea's main wired and wireless telecom entities.
The stake of foreign investors amounts to 48.94 percent for Hanaro Telecom and 48.41 percent for the country's top mobile operator SK Telecom.
The clip is relatively low for the smaller mobile telephone service providers of KTF and LG Telecom at 14.77 percent and 24.22 percent, respectively.
There are another barriers specific for KT that foreigners cannot hold more than 5 percent of KT shares, the provisions enacted in 2002.
However, big-three shareholders ? Brandes Investment Partners, Templeton Global Advisor and Capital Research & Management Company ? are exempt from the rule since their stakes already surpassed the plateau before introduction of the restriction.
KT also claimed the big-three players will not spearhead any hostile move because they are all investment funds and are now amicable to the management.
Experts widely sided with the MIC and KT.
"We should break from the diehard myth that foreigners are a single player. Overseas shareholders of KT have different concerns and interests and they are unlikely to unite anytime soon," Woori Securities analyst Stan Jung said.
"There are the likelihood of foreigners- led hostile takeover bids but such an extreme scenario would be plausible only when the financial status of KT falls into big trouble, a remote possibility at present."
Mirae Asset economist Kim Kyung-mo concurred.
"Should KT be unsafe from foreign raiders, our flagship firms like Samsung Electronics and POSCO might be more unsafe since more than half of their shares are possessed by overseas players," Kim said.
"However, not a single hostile takeover attempt has happened yet against the companies. We do not have to scramble at KT, which is more safe." In response, Suh contended despite the low possibility, the nation should ferret out more secure measures to shield KT, considering the firm's significance.
"Even though the likelihood is low, we should not run even a tiny risk on KT, which operates Korea's cornerstone assets in telecom. It is like how we subscribe for car insurance although the probability of car accidents are pretty low," she said.