Bain joins the battle for the world's largest zinc smelter

Private equity firm Bain Capital has joined a bitter struggle for control of the world's largest zinc smelter, one of the big name industrial firms trying to fend off South Korea's leading buyout group.

The war over Korean zinc is being closely watched by the miner because of concerns it could delay negotiations on the smelter's annual zinc supply contract, which serves as a global benchmark. A close partner of major resource groups such as Korea Zinc Tech Resources and Trafigura.

Michael Byeong Joo Kim, known as the “godfather of Asian private equity”, is leading a takeover bid targeting Korea Zinc's chair Choi Eun-beom, one of the company's two founding families.

Kim's firm, Seoul-based MBK Partners, has accused Choi of overseeing a decline in profits at Korea Zinc, which has a market capitalization of $11 billion, since he took the helm in 2019.

But Choi announced on Wednesday that he had Bain's support to protect the company from a “hostile, predatory attack.” As part of the deal, which also involves a $2bn share buyback of Korea Zinc, Bain will pay Won430bn ($326mn) for a 2.5 per cent stake in the company.

Korea Zinc, the world's largest zinc smelter by annual output, also produces battery materials essential to Western efforts to build a non-Chinese electric vehicle supply chain. Its management said it was facing a hostile takeover bid led by foreign-backed “corporate raiders” intended to sell the company to China.

“For the sake of our nation, our people and our shareholders, we have to stop selling our technology to China,” Lee Jae-jung, vice chair of Korea Zinc, told reporters last week.

But Park Yoo-kyung, head of emerging markets equities at APG Asset Management, said Korea Zinc's management was engaging in “dirty public propaganda exploiting Koreans' fear of industrial competition from China”.

MBK has publicly pledged not to sell the company to a Chinese bidder or a buyer not acceptable to the Korean government.

Korea Zinc and its parent company, Yang Poong Group, were co-founded by the respective patriarchs of the Choi and Jang families – both North Korean refugees. Under an informal agreement reached between the two co-founders, Korea will be run by the Jink Choi family and its affiliates by the Yang Poong and Jung families.

However, last month, MBK announced that the Jang family had handed over its stewardship of 33.1 percent of Korea Zinc to a private equity fund and that together they would offer a tender for enough shares to hold close to 50 percent. .

Jeongwon Kim, a partner at MBK, said the Jang family approached the fund because of their concerns about Choi's leadership. He noted that Choi and his extended family own only 15.6 percent of Korea Zinc.

Kim told the Financial Times that Choi was responsible for “poor corporate governance” at the company, singling out a multimillion-dollar investment made without board approval in a fund run by a close school friend of Choi, currently on trial for stock manipulation.

Korea Jink argued that the funds, which were invested in a K-drama studio and a K-pop label among other businesses, were legitimate investments that did not require board approval.

Several strategic investors in Korea Zinc have told the FT how the takeover battle — and possible subsequent private equity involvement — will affect the company, a major global producer of refined zinc, lead and silver. Shareholders include South Korean companies LG, Hanwha and Hyundai, as well as subsidiaries of Swiss trading house Trafigura.

“Since the business cooperation with Korea Zinc requires long-term investment, there is concern that the success and continuity of the business cooperation may be jeopardized if the management control dispute is prolonged. [MBK’s] Tender offer,” said Hanwa.

One shareholder expressed concern about future investment in a nickel smelter that Korea Zinc is building in the southeastern city of Ulsan. When completed, the smelter, in which Trafigura is an investor, will be a key source of nickel that meets US sourcing rules for battery materials.

Trafigura said Korea Zinc's decision to diversify into battery metals is “a well-thought-out move to expand its portfolio”.

The trading group, which owns a 1.5 percent stake in Korea Zinc, praised the management team in a statement, adding: “As shareholders, we are monitoring any corporate actions that may disrupt the company's operations or future prospects.”

But Namuh Ri, chair of the Korea Corporate Governance Forum, said fears of disruption were overblown, arguing that Korea Zinc would be better off being run by professional managers appointed by MBK rather than an “unproven” third-generation heir like Choi. .

“MBK is a high-quality private equity fund with most of its funds from pension endowments, so it is unlikely to seek short-term gains from Korea Zinc,” Rhee said.

The story unfolds at a time when zinc smelters around the world are struggling to get enough input material due to low supply of mined zinc concentrates.

Korea Zinc typically negotiates an annual contract on zinc processing fees with its main supplier Tech Resources in January or February, which serves as an unofficial global benchmark for the rest of the industry.

If existing management is distracted by the takeover battle, it could “delay the first round of information sharing in the annual zinc treatment charge negotiations,” said Colin Hamilton, commodity analyst at BMO Capital Markets.

MBK announced last week that it was increasing its tender offer, which closed on Friday, from Won660,000 to Won750,000 per share. Shares in Korea Zinc rose nearly 30 percent to Won713,000 in late trading on Wednesday since the initial tender offer was announced.