Local activist fund KCGI opposes Korean Air’s sale of in-flight businesses

  • 2020-07-17

Korea Corporate Governance Improvement (KCGI), a local activist private equity fund, is unhappy with Korean Air Lines Co. Ltd’s decision to sell off in-flight businesses to a private equity fund.

On July 17, the KCGI released a statement opposing Korean Air’s decision to sell off in-flight duty-free and meal service business. The activist fund had previously requested Hanjin KAL to offload non-core assets to boost return on assets, to which the parent group had agreed.

KCGI is the second-largest shareholder with a 19.55% stake in Hanjin KAL, the parent company of the airline carrier.

Korean Air put up 37,000 square meters of undeveloped land in central Seoul (Songhyeon-dong) on the market, but it remains unsold. The company’s mileage program, and the maintenance and repair organization units were also up for sale and received much interest, but there were no buyers due to uncertainties that stemmed from the global pandemic.

The KCGI is against selling in-flight businesses because they will be crucial to the airline’s performance once Covid19 is over. Also, existing employees are likely to be worried about their job security.

The activist fund is concerned that the domestic airline may have selected a private equity fund to be its white knight. Korean Air should have held an auction process to select the most ideal candidate, according to the KCGI.

Korean Air is currently finalizing the terms and conditions of the deal with the country’s second-largest private equity firm Hahn & Company.

“We want Hanjin Group’s business to return to normal, and we are not criticizing the management’s efforts in trying to solve the crisis. We ask the airline’s management to fully take into consideration the interests of employees’ in the asset sale process, and to select an independent external manager to proceed in a public and transparent manner,” the KCGI said in an official release.

Korean Air refuted KCGI’s claims.

“The entire process was conducted reasonably and fairly. We received proposals from many potential buyers and reported them to the board of directors. Among the candidates, Hahn & Company offered the most favorable conditions,” Korean Air explained.

The flagship carrier added that they are still committed to offloading non-core assets including the property in Songhyeon-dong and their stake in Wangsan Marina, a resort located in Incheon.

Meanwhile, M&A experts have expressed different views from KCGI.

“Companies that undergo restructuring need to put up assets that will be sellable in order to secure cash. It’s the market norm. Putting up assets that won’t sell defeats the purpose,” said an industry banking source.

KCGI first purchased shares in Hanjin KAL in November 2018, making headlines because it was the first time a domestic private equity fund had contested the management of local conglomerates. The activist fund had requested the company to maximize shareholder value by revamping its governance structure.

KCGI partnered with Hyun-a Cho, the elder sister of Korean Air Chairman Won-tae Cho, and local construction company Bando Engineering & Construction Co. to win the proxy fight against the incumbent management. The alliance holds a combined stake of 45.23%, which is about 4% higher than the 41.14% stake held by Chairman Cho and his supporters. However, the alliance failed to replace current board members including Chairman Cho at the last annual shareholder meeting on March 27.

Prior to KCGI, there were several activism campaigns against Korean conglomerates led by foreign activist funds. Sovereign Asset Management challenged SK Group’s corporate governance in 2003. Elliott Management Corporation opposed the merger between Samsung C&T and Cheil Industries in 2015 and engaged in a proxy battle urging Hyundai Motor Group to adopt a holding structure instead of a circular shareholding structure in 2018.

The family-run conglomerate Korean Air has been criticized for its backward approach in corporate governance.

By Suna Lee

suna@hankyung.com

<Edited by Danbee Lee>