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South Korea's LG faces challenge from US hedge fund

Whitebox urges shareholders to oppose Koo family's plan to spin off affiliates

SEOUL -- LG, South Korea's fourth-largest conglomerate, is headed for a showdown with a U.S. hedge fund at its annual general meeting on Friday, in the latest challenge to the country's powerful family-run business groups by an activist investor.

Whitebox Advisors is urging shareholders to vote against a plan by LG's founding Koo family to spin off five affiliates through a new holding company that would likely be controlled by the chairman's uncle.

The hedge fund has accused the family -- who collectively own a 46.1% stake in LG -- of treating minority shareholders like "second-class citizens."

LG announced last November that it was looking to spin off companies involved in everything from trading to construction materials to display semiconductors and merge them into a new entity so that LG itself can focus on its core businesses of batteries, electronics and telecommunications.

Whitebox says this would compromise the company's ability to create value for shareholders. Rather than spinning off minor affiliates, the fund argues that LG needs to address the fact that it trades at a 66% discount relative to its net asset value as of March 2.

"The spin-off seems to have been conceived for the inappropriate purpose of solving a family succession issue between the company's chairman and his uncle," Whitebox said in a letter. "The spin-off undermines LG's credibility and market position by revealing an insular corporate governance model that treats minority shareholders like second-class citizens."

LG denied such a claim. "With the spin-off the company seeks to restructure its business portfolio and corporate governance, dispersing investment risks and improving specialties in each business," the company said in a letter sent to shareholders.

The five affiliates to be spun off are LG International, Pantos Logistics, LG Hausys, Silicon Works and LG MMA. The plans is to bring them under new holding company called LX Holdings.

LG is the latest South Korean chaebol conglomerate targeted by activist funds questioning its behavior. The Korea Corporate Governance Improvement Fund threatened the Cho family's control of Korean Air Lines by purchasing a key stake in the airline's holding company.

KCGI's attempt failed, as a state lender helped the Cho family maintain control of KAL by initiating a merger of the company and Asiana Airlines.

Whitebox, however, has some support. Independent proxy advisory firms earlier this month backed the fund's recommendation that shareholders vote against LG's spinoff plan. Institutional Shareholder Services said that combining the five affiliates' assets into a new listed company is "questionable" considering the diverse operations of those entities.

Glass, Lewis & Co. said Whitebox's suggestions -- which include a proposal to establish an independent corporate governance committee and implement a capital management plan -- could benefit all shareholders of public companies in general.

Analysts say Whitebox has little change of prevailing against the Koo family given its large stake in the company. Chairman Koo Kwang-mo is the No. 1 shareholder, with a 15.9% stake, followed by his uncle Koo Bon-joon, with 7.7%. The National Pension Service has a 7.8% stake in the company, while Whitebox has less than 5%.

Under the proposal, Bon-joon is expected to control LX Holdings, and in return will unload his stake in LG.

"We expect that [the spinoff plan] will be passed easily in the annual general meeting scheduled for March 26," said Choi Nam-kon, an analyst at Yuanta Securities. "The spinoff aims to help LG adviser Koo Bon-joon control the newly established holding company. The spinoff will be completed by a stock swap between LG Chairman Koo Kwang-mo and adviser Koo Bon-joon."

This is a familiar playbook for LG. In the past, whenever the eldest son has taken over the group from his father, the uncles of the heir "left" by converting their stakes in the group into new, independent companies.

That is one reason there are so many groups run by the Koo family. Arms industry-focused LIG was established by the LG founder's brother. Koo Bon-keul, an uncle of the fourth-generation chairman, set up the fashion group LF by spinning off LG's fashion brands.

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