Investor Concerns Mount as MBK Faces ‘Overpayment’ Controversy Amid Hostile M&A of Korea Zinc

According to a media report, MBK Partners, currently pursuing a hostile takeover of Korea Zinc (KRX:010130), is facing criticism over an alleged "overpayment" following additional share purchases, leading to growing discontent among some investors.

The controversy stems from recent comments by MBK executives at press events, where they valued Korea Zinc's intrinsic worth at approximately KRW 14 trillion. Despite this valuation, MBK reported to have spent about KRW 290 billion between late October and early November to acquire additional shares at prices significantly exceeding their initial public tender offer and previously stated fair value.

According to regulatory filings with the Financial Supervisory Service (FSS), MBK's special purpose company (SPC), Korea Corporate Investment Holdings Co., continued acquiring Korea Zinc shares even after the tender offer period concluded. From October 18 to November 11, MBK conducted 15 on-market purchases, securing an additional 282,366 shares (1.36%) and raising its stake to 39.83%. The total expenditure amounted to KRW 292.1 billion, with acquisition prices ranging from KRW 824,394 to KRW 1,332,930 per share.

Previously, MBK criticized Korea Zinc for executing share buybacks at KRW 830,000 and KRW 890,000, arguing that these prices were above fair value and detrimental to the company. However, MBK’s decision to purchase shares at even higher prices has raised questions about its consistency in valuation assessments.

As of December, Korea Zinc's market capitalization has surpassed KRW 30 trillion, more than double the intrinsic valuation MBK had previously stated.

Industry insiders suggest that concerns may be emerging among the Limited Partners (LPs) of MBK’s "Buyout Fund VI" regarding the elevated acquisition prices and potential implications for their exit strategies. They note that MBK’s acquisitions at elevated prices could complicate the LPs’ ability to recover their investments.

Additional concerns focus on the financial risks stemming from MBK’s use of borrowed funds to finance the hostile M&A, as interest costs may be passed on to investors. MBK has indeed leveraged external loans in addition to fund assets to finance its acquisitions during its hostile takeover attempt of Korea Zinc.

Korea Corporate Investment Holdings Co. borrowed KRW 1.57 trillion from NH Investment & Securities at a minimum fixed interest rate of 5.7% for nine months. The annual interest cost, estimated at KRW 90 billion, may negatively impact returns for LPs and increase financial pressure on the fund.

Some analysts speculate that MBK Partners’ ability to continue purchasing Korea Zinc shares at elevated prices, despite concerns from LPs, may be due to provisions in a management cooperation agreement with Young Poong. If the agreement contains clauses that indemnify MBK for potential losses, the firm may face no significant issues. However, if this analysis is accurate, Young Poong could be exposed to allegations of breach of fiduciary duty, potentially leading to heightened legal risks.

At a press conference on December 10, MBK Vice Chairman Kim Kwang-il was asked whether the firm had acquired additional shares after November 11. He declined to confirm any further on-market purchases, further fueling speculation.

Meanwhile, the urgency for MBK to secure additional shares ahead of an extraordinary shareholders’ meeting in January has intensified. Some media reports suggest that MBK has continued to acquire shares, implying further transactions may have taken place in December.

Concerns are also mounting over MBK’s exit risks. The firm’s acquisition of Korea Zinc shares at prices perceived as “excessively high” has sparked worries about its ability to provide returns to institutional investors such as pension funds, sovereign wealth funds, mutual aid associations, and financial institutions.

An industry insider remarked, “MBK has continued to acquire shares at prices significantly higher than the intrinsic valuation it communicated to its LPs, fueling a controversy over “overpayment.” If this issue escalates among LPs, MBK could potentially be facing a serious crisis. The excessive costs not only heighten exit risks but also risk undermining Korea Zinc’s competitiveness. In an effort to recover yields, MBK might resort to rapid liquidation of company assets and cash reserves, which could have severe repercussions for the company’s long-term health.”

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