S.Korean activist fund KCGI eyes foundry DB HiTek buyout

Korea Corporate Governance Improvement Fund (KCGI) is eyeing a controlling stake in DB HiTek Co. as the activist fund became the second-largest shareholder of the foundry chipmaker with its purchase of a 7.05% stake in the company on Thursday. 

KCGI is slated to buy additional stakes in DB HiTek to become the top shareholder, according to investment banking sources on March 31.

The Seoul-based activist fund acquired the shares for 196.4 billion won ($150.6 million) to influence DB HiTek’s management, the foundry player said in a regulatory filing on Thursday.

The parent DB Group owns a 12.39% stake in the foundry subsidiary through tech and trading affiliate DB Inc. Group founder Kim Jun-ki holds 3.6%, followed by DB Life Insurance Co.’s 0.78% and DB Kim Jun ki Cultural Foundation’s 0.62%.

CONVERSION TO HOLDING FIRM

Market watchers see KCGI will target DB HiTek’s governance issues, such as the parent group’s conversion to a holding company, the fabless business split-off and succession in the family business.    

DB Group, with more than 11 trillion won in total assets, has been under pressure to transform into a holding firm. Under Korea’s Fair Trade Act, a company must convert to a holding firm if its total assets exceed 500 billion won and its first- and second-tier subsidiary shares make up more than 50% of its total assets.

DB HiTek shares exceeded half the group’s total assets as of end-2021; they didn’t as of the end of last year. If the parent group converts to a holding company, it must increase its12.39% ownership in DB HiTek to more than 30% under the law, which would require nearly 500 billion won.   

Investors were also concerned about whether DB Group will split off DB HiTek’s fabless business and list the new unit on the local market. On the fear of that, retail shareholders dumped DB HiTek stocks last year – the foundry chipmaker’s book value nearly halved from 400.7 billion won as of end-2021 to 204.7 billion won as of end-2022.

DB HiTek passed on the split-off plan at the shareholders’ meeting on Wednesday.  

OTHER GOVERNANCE ISSUES

DB Group has few options to protect its management rights, given its financial conditions. The parent group’s cashable assets on standalone basis reached 13.5 billion won as of end-2022; based on the share price of 74,500 won, the assets are equivalent to 180,000 stakes, only a 0.4% holding in DB HiTek.

Market speculators are also watching whether KCGI will raise issues on DB Group’s management and succession.

Group founder Kim, who resigned as chairman in 2017 after accusations of rape and sexual harassment, returned to the business in 2021 as an executive of DB Inc. His children Kim Nam-ho and Kim Joo-won, respectively the group chairman and vice chairman, are also said to be rivals for management.

DB HiTek stock on the main bourse Kospi rose 18.3% to close at 72,300 won on Friday.

Write to Ji-Eun Ha at hazzys@hankyung.com
Jihyun Kim edited this article.