How Shareholder Activism Could Unlock Hidden Value

During their recent episode, Taylor, Carlisle, and Ryan Albert discussed How Shareholder Activism Could Unlock Hidden Value. Here’s an excerpt from the episode:

[Ryan] Sure. I can talk about an engagement that I was recently doing just because I think live and stress tests some of the different aspects of governance reform. So there’s a company called Gulf Zone Holdings, and it’s all public.
You can actually find it on a website that I set up dedicated to it called gulfzonefairvalue.com. I have three open letters there. But basically, Gulf Zone Holdings is a conglomerate that has various stakes in gulf-related assets.

And its most valuable stake is a minority stake in a company called Gulf Zone County. Gulf Zone County is the largest golf course operator in Korea, and its 68% partner is the largest private equity fund in Korea. And that asset is in the process of being sold.

It was reported in the media that it was being sold. And that, if you took any relevant metric or relevant valuation of what that 32% stake was for Gulf Zone Holdings, which is the publicly traded holding company, was worth significantly more than the market cap of that company. And that does not even include the golf courses and real estate that that business owns and the stakes and some other assets.

So it was, on my appraisal, trading 0.15 to 0.2 times book value. Pretty obscene prices. At the end of June, the controlling shareholders of that entity, which owned about 60% of the shares, excluding treasury shares, set up a separate vehicle.

And they made a tender offer at a 50-something percent premium to the ongoing share price. That share price had been depressed for a variety of reasons. One, because it was semi-illiquid, because of the holdsco and opco structure.

Its operating company is the largest golf simulator business in Korea. So that was also listed. So it had a holdsco-opco structure.

And then, as you can imagine, with the share price that went sideways or even down over the past few years, investors got fed up and sold to buy more of Samsung and SK Hynix and other AI-related stocks. So share price tanked. And the controlling shareholder vehicle on a share price that was depressed offered a 50-something percent premium.

And that was at a their offer was at 0.35 times book value. So that, to me, at least was not a fair offer for a variety of reasons. One, simply being that as a buyer of a business that’s worth 0.35 times book value, the minute you own it, it’s closer to one times book value. Maybe it’s a little less. Maybe it’s even more. I thought it was more, actually, because a lot of their stakes, the stake in just because it was its fair value on the balance sheet was not consolidated.

So, long story short, we wrote an open letter to the board because we felt there were a variety of disclosure-related issues and process-related issues. Or, sorry, we wrote an open letter to the board and shared it with the public and was covered in the media and basically highlighting how the Ministry of Justice’s guidelines, which came out in February of this year, which were, again, this is going into some governance points here, and happy to elaborate on them. And that’s why I’m bringing up this case.

The Ministry of Justice guidelines covered mergers, spinoffs, comprehensive share exchanges, and subsidiary listings. And it’s basically where Korean minorities have lost the most. And it’s, in general, meant to address when controllers’ interests and the general shareholders’ interests conflict.

And the guidelines recommended a special committee of independent directors, external fairness opinion, documenting consideration of alternatives, fuller disclosure, and shareholder engagement. And a lot of these practises, I felt, were not being fulfilled to their degree. So, we wrote an open letter highlighting all this.

And the tender offer, which is kind of in its own grey zone, because it’s a private transaction between the vehicle and minorities, and it doesn’t fall under the same rules, that needed around 90 percent to delist. So, for me, I felt that enough shareholders could potentially see the open letter and see the value and understand that they would not want to delist and keep value intact. I felt that value was at least 30,000 won per share.

The tender offer price was at 6,700. So, a big divergence between what the offer was and what I felt fair value was of all the assets. So, then throughout all this, I felt that the board was not executing their fiduciary duty, which, again, goes to the first Commercial Act Amendment, which is the first thing that was passed under the president.

So, in the past, the board of director members only had a fiduciary duty to the company and not to the shareholders. And then the rules changed or that now they are legally answerable to shareholders, not just the company. So, they must protect the interests of all shareholders as a whole and treat all shareholders equitably.

So, I leaned on that a lot throughout my processes. Just to give you an example, up until just a couple or a few days before the tender offer window was going to expire, the board did not disclose any of their opinion. They waited multiple, multiple weeks, and I felt that was not a fair part of the process.

And the board also abstained from issuing or saying whether or not it felt that the actual price or the value being offered was fair, but they still recommended that investors go through with the tender offer price. So, I was leaning on that angle, but there’s been no precedent test yet of all of this. But anyway, just to walk through this, during the first tender offer, the controlling shareholder group got up to 85%, short of the 90%.

A few days later, they launched a second tender offer at the same exact price, and investors saw right through that. And started bidding the price higher, above the tender offer price, and then it went higher and higher. And I wrote a couple other open letters, and then a big change was on the amended Capital Markets Act was passed, I think, if I recall, on August 20th, during the second tender offer window.

And the second Capital Markets Act was previously, Korea had a formula that let the controlling shareholders virtually inflate. I don’t want to say pick the price of a merger, but the price was based on the share price. So, the merger ratio between listed affiliates was set by a market price formula, using the weighted average of recent trading prices.

So now, on August 20th, going forward, all listed company transactions, the value must now be a fair value that comprehensively weighs share price, asset value, and earnings value. And that same standard applies to appraisal rights. So, that was enacted during the second tender offer window.

And that meaningfully changed the scope of what I was looking at or what I was doing, because the way for the controlling shareholder group to maybe push this through and delist it would be a comprehensive share exchange. And that would fall under this new rule, potentially. So, results came out after the second tender offer in early September, and zero shares were tendered, like literally zero shares were tendered.

So, immediately after that, the controlling shareholder group made a press release saying they were seizing the delisting process, and they’re going to pursue enhancing corporate value instead. So, now the share price is meaningfully above the tender offer price, and no new updates on that. But that’s an example of something that I was recently involved in, with a few different factors, with the First Commercial Act Amendment, the Capital Markets Act Amendment, the MOJ guidelines.

So, a few of the meaningful governance reforms were all in play in this recent engagement that I had. I’ll pause there.