SEOUL, March 9 (UPI) -- Sovereign Asset Management Ltd., the single-largest shareholder of SK Corp., has geared up for another round of ownership battle with the South Korean family that manages the country's largest oil refiner.
The Dubai-based investment fund, which is bracing for a voting showdown at the annual general meeting in Seoul on Friday, says it is gaining growing support from shareholders to shake up the refiner's scandal-tainted ownership.
On Wednesday, it launched a full-page advertising blitz in major newspapers in Seoul, calling for support from local shareholders in overhauling the company's corporate governance.
In an apparent bid to put pressure on SK Corp, Sovereign last month bought a 7.2 percent stake in LG Electronics Inc. and a 7 percent interest in LG Corp. It touted the two LG firms as the companies with the "highest corporate governance standards," vowing to seek further transparency to boost their corporate values.
But most analysts here predict SK Corp to defend the family-run management from Sovereign's bid to kick off Chairman and CEO Chey Tae-won on the back of domestic institutional investors and individual shareholders who are joining forces to fend off "hostile" takeover attempt by foreign investors.
Some economists raise a possibility that Sovereign is preparing selling off its stake in the refinery should it fail to oust Chey at the shareholder's meeting this week, which followed its aborted bid last year to install its candidate in the board.
The offshore fund has already made substantial profits, estimated at more than 1 trillion won ($1 billion), thanks to a soaring share price. Sovereign bought its stake in SK Corp when the refiner's stock price had slumped under 9,000 won in the wake of an accounting fraud in 2003. The stock closed at 6,5400 won on Wednesday.
"Sovereign may think this is good time to exit SK Corp as earnings growth in the refining and petrochemical businesses have already been sufficiently reflected in the share price," said Kim Jae-jung, a senior economist at Samsung Securities. If Sovereign loses out at the AGM and cash out of SK Corp, the refiner's share may tumble, he said.
Sovereign, which now holds a 14.96 percent stake in SK Corp., has been leading a push to shake up the finery's family-run South Korean management led by Chey convicted over a $1.2 billion accounting scandal, arguing that the weak corporate governance standards have dampened its valuation.
Its much-touted campaign to improve management accountability has raised hopes of better corporate governance at the company, which sharply boosted shareholder value.
Chey was sentenced to three years in prison on charges of illicit dealings and accounting aimed at tightening his control of the family-run business. But he was released last October on bail. Chey has recently been recommended for a seat on the company's board.
The 43-year-old business tycoon, heir to the company's founding family, has only a 0.83 percent stake in the refinery, the flagship of the country's fourth-largest conglomerate SK Group, but has managed the company with the help of group affiliates who control 15.71 percent.
SK C&C, a sister company of SK Corp, has an 11.3 percent stake at the oil refiner. SK Engineering & Construction and SK Chemical also have a combined 3.58 percent stake, according to SK Corp officials.
Korea Investment and Trust Management Co Ltd, which has a 3.6 percent stake, and Chohung Investment and Trust Management Co Ltd with a 2.55 percent interest have promised to vote for Chey, SK officials said. They said the refiner has secured the support of 35 percent of the shareholders, including Samsung Electronics Co that controls 1.39 percent.
The country's two technology firms, Samsung Electronics and Pantech, have bought SK Corp shares as "white knights" in a bid to help it in its battle with Sovereign. South Korea's local Chamber of Commerce and Industry has also launched a campaign to buy stocks of SK Corp to protect the country's top oil refiner from a "hostile" takeover bid by foreign investors.
"The moves by local companies have almost dampened hopes of foreign shareholders to replace the current management," said Lee Jeon-hun, an analyst at Dongwon Securities.
Lee and other analysts say SK Corp has the edge after successfully lobbying swing votes. Given the fine balance in stake holdings between the two sides, the votes of floating minority shareholders and foreign investors, who hold a combined 50 percent stake, are likely to be pivotal, they say.
SK Corp is currently held 45.6 percent by domestic investors and 54.4 percent by foreigners. Floating local shareholders hold a 10 percent stake. Foreign investors, excepting Sovereign, have a combined a 40 percent interest.
"Individual and foreign shareholders are unlikely to vote against SK Corp's current management because it has reaped much profits under Chey's leadership," said Park Dae-yong, an economist at Hyundai Securities. "What investors want most is larger dividends, and shareholders at SK Corp have enjoyed the benefit of a soaring share price," he said.
SK Corp, South Korea's biggest oil refiner, posted its net profit for 2004 skyrocketed to 1.64 trillion won ($1.64 billion) compared with profit of just 15 billion won ($15 million) a year earlier, thanks to fat margins on its gasoline and diesel products.
Sovereign says SK Corp's strong financial performance was simply a result of external factors, such as higher oil prices and refining margins. SK Corp's return on equity increased just 6.3 percent for the past five years, far less than the average of its rivals that posted 17 percent, attributing it to problems in corporate governance and leadership.
"By voting against Chairman Chey, Koreans will be removing a drag on SK Corp's value," Sovereign said in a recent statement.
Analysts here admitted high oil prices are a main factor behind SK Corp's strong performance, but the refiner's years-long projects to develop crude oil sources overseas and other profit-making projects have also contributed to its huge profits last year.
"SK Corp sales went up as it started commercial production of crude oil in blocks in Vietnam, Peru and Libya," said Lee Hi-churl, an analyst at CJ Investment & Securities. With stakes in 20 blocks in 12 countries, SK Corp holds 300 million barrels of oil equivalent reserves and is the most active upstream player in South Korea.
SK Corp said it posted the biggest-ever profits last year "encouraged by demand growth in China and a good petrochemical business environment at home." SK Corp, which runs Asia's largest oil refinery, has benefited from the refining boom in Asia, coupled with China's economic growth.
SK Corp said it has taken a series of measures to improve corporate governance and enhance managerial transparency. The oil refiner has increased the number of outside directors on its 10-member board to seven from five, in what company officials say to improve monitoring the company's corporate governance.
It held board meetings at the refinery plant in Ulsan, 260 miles southeast of Seoul, and its plant in China for "on-spot" gatherings in which they discussed ways to enhance managerial transparency.
"But SK Corp still has a long way to go to address concerns about corporate governance," said Park of Hyundai Securities.
