Posco Might Need to Steel Itself For Pressure By Activist Investors [WSJ]
By LAURA SANTINI
March 6, 2006; Page C10
The brewing proxy battle between U.S. investor Carl Icahn and South Korean tobacco company KT&G is drawing attention to another potential Korean target of shareholder activism, steelmaker Posco.
Analysts and investors say Posco, the world's fifth-largest steel producer by output, could attract so-called activist investors, who are known for snapping up large equity stakes and then agitating for changes they say they think will lift the share price. Shares of these companies tend to rise on the expectation that management will seek to fend off an attack by implementing more-effective strategies. Whether or not changes are made, activist investors often cash out of their position with rich profits.
In the case of KT&G, Mr. Icahn's group recommends several changes that some investors say are long overdue. Rebuffed by the company, the Icahn-led investors have upped the ante by saying they want to take over KT&G.
Now, some people are weighing similarities and differences between Posco and KT&G, and wondering whether Posco will find itself in the sights of shareholder activists.
Posco resembles KT&G in several ways. Once a state-owned monopoly like KT&G, Posco was fully privatized in 2000 and doesn't belong to one of South Korea's family-owned conglomerates, or chaebols. This means the company shares fewer crossholdings with other entities that might rally around management and prevent minority shareholders from forcing change.
As with KT&G, foreigners own the lion's share of Posco. They hold about 70% of the steelmaker, while the company's treasury holds 11% and domestic investors own the remaining shares. Posco's largest shareholder, U.S. money manager AllianceBernstein, a unit of Alliance Capital Management, holds more than 5%. The diffuse shareholder base makes it difficult for Posco to defend itself against activist intervention.
In another similarity with KT&G, Posco stock has a low valuation compared with its peers. Its shares trade at less than five times earnings. By comparison, the third- and fourth-largest steelmakers, Nippon Steel and JFE Holdings, trade at about 14 and 17 times earnings, respectively.
Posco also is shouldering a large load of noncore assets, some $5 billion by one analyst's estimate, including an equity stake in SK Telecom. The company has many subsidiaries, some of which are suppliers started by former employees.
"One of Posco's problems is that it is too big," says Yoo Jung Sang, chief investment officer of PCA Asset Management in Seoul, who says Posco is one of his major holdings. "The whole structure of these companies needs to be examined by management."
Similarly, Mr. Icahn's group has urged KT&G to shed a number of noncore businesses.
Posco has been subject to a broad slide in steel prices, which contributed to a 68% decline in fourth-quarter earnings from a year earlier to 382 billion won ($393.3 million), its lowest quarterly profit in two years. Sales slipped 7.2% to 5.2 trillion won.
Despite that performance, analysts say Posco management has generally done an effective job keeping profit strong, even as demand for steel from China, a crucial market, waned last year.
"It has the highest margins in the business, [yet] nothing is happening to the stock price," says an analyst from a global investment bank who says he believes Posco is a candidate for a buyout. During 2005, Posco's shares rose only 8%, despite a banner year for South Korea's stock market, which saw its major index surge by more than 50%.
The analyst says "there is a feeling that the company is not friendly to shareholders." He says its payout ratio -- the percentage of profit paid to shareholders in dividends -- is from 15% to 17%, compared with about 80% for China Steel of Taiwan.
A Posco spokesman says the company doesn't know what the dividend paid out in 2006 will be, because this year's profit is a determining factor. As for any takeover or activist scenarios, he says the company will continue to "go its own way."
Posco shares have jumped 15% this year, closing Friday at 232,000 won. One apparent catalyst is the industry trend to consolidate, illustrated recently by Mittal Steel's hostile bid to take over Arcelor.
So will Posco become a takeover target? In addition to its inexpensive share price, salable noncore assets and zero debt, the company carries a net cash position of $2.5 billion to $3 billion. A buyer could slash the company's sticker price considerably by grabbing the cash and selling unnecessary assets.
Any acquirer would have to reckon with the strong possibility of intervention by the Korean government. Unlike KT&G, Posco plays a crucial role in Korea's export economy, as it supplies the country's auto makers and shipbuilders with attractively priced steel.
Analysts say such a bid is legally possible -- the government doesn't impose limits on foreign ownership of Posco, as it does in telecom and broadcasting sectors -- but a long shot.
For this reason, some investors say, grass-roots shareholder activism that pressures management but doesn't threaten the company may offer the only avenue for pushing aggressive change at Posco. |
