IPOs highlight imminent successions at Korean chaebol

South Korean business magnates are gearing up for initial public offerings of conglomerates’ affiliates, in an apparent bid to allow their siblings to cash in on their stock holdings from the proposed exit under the respective business succession plans.

Market watchers perceive the moves as the chance to give cash-hungry siblings options to solidify legitimate control over the family-owned conglomerates here, which include buying shares in the group’s key affiliate that stands on top of the established governance structure and paying necessary taxes. 

On Friday, CJ Olive Young sent requests for bids to investment banks to undertake its IPO proceedings as underwriters, eyeing a stock market listing by the first half of next year.

The news comes months after CJ Olive Young closed a pre-IPO deal at a 1.8 trillion won ($1.5 billion) valuation in March. CJ Olive Young raised 414.1 billion won in proceeds from Korea-based Glenwood Private Equity in March, in exchange for a 22.56 percent stake in CJ conglomerate’s health and beauty subsidiary.

The question is whether the proposed IPO of CJ Olive Young, which operates over 1,200 drugstores, could accelerate the succession of Korea’s 13th-largest chaebol CJ Group, now controlled by Chairman Lee Jay-hyun.

Lee‘s eldest son Sun-ho was holding an 18 percent stake in CJ Olive Young, and eldest daughter Kyung-hoo was holding a 7 percent ownership, until end-2020. Their control had been diluted due to the introduction of Glenwood as a new shareholder earlier this year and the siblings’ partial stake selloff to the investor.

CJ Olive Young logged 58.8 billion won in net profit in 2020, 2.5 times higher than the previous year. The company was spun off from the conglomerate’s information technology arm CJ Olive Networks in 2019.

With CJ Olive Young’s IPO underway, the company will determine how many shares Sun-ho and Kyung-hoo would sell through the IPO procedures, and at what valuation CJ Olive Young can go public.

The market is also keeping a close eye on the siblings’ potential ownership in top holding company CJ Corp.

Sun-ho owned 2.75 percent of common shares in CJ Corp. and Kyung-hoo held 1.19 percent voting rights.

But beyond their common shares, both Sun-ho and Kyung-hoo held over 1 million convertible preference shares in CJ Corp., respectively. These securities are trading on the stock market at a 20 percent discount compared to CJ Corp.’s ordinary shares.

In the meantime, another family-owned conglomerate Hyundai Motor Group has openly embarked on the IPO process of its civil engineering arm Hyundai Engineering on Thursday.

According to the Korea Exchange, Hyundai Engineering handed in documents for a listing application on the nation’s top bourse Kospi. The company will be subject to an abridged review process by the bourse operator, so that it can submit a prospectus to the financial authorities before year-end. Its underwriters are Mirae Asset Securities, KB Securities and Goldman Sachs Seoul Branch.

The IPO process, at which the company targets up to 10 trillion won in equity value, is expected to give Hyundai Motor Chairman Chung Euisun a chance to secure cash to implement a full-fledged succession plan.

As of June, Chung held a 11.72 percent stake in Hyundai Engineering.

Chung has several options to resolve the circular cross-shareholding structure and pursue a transparent governance of the auto giant, which is the second-largest chaebol, including increasing his stake in what could become the group’s holding company such as Hyundai Mobis.

However, their IPO attempt at the valuation they envision could face a road block, given that market uncertainties at home and abroad are cooling down investor sentiment, especially toward the new entrants on the domestic stock market.

According to the KRX, stocks that were listed during the third quarter saw their price rise 49 percent on average on the debut session’s closing from the IPO price set during the book building process. This was significantly lower than 72 percent over the course of the first half.

By Son Ji-hyoung (consnow@heraldcorp.com)