February 27, 2019 / 7:17 AM / 7 months ago

Breakingviews - Driving hard bargain could backfire on Hyundai

Employees of Hyundai Motor Group attend the company's new year ceremony in Seoul, South Korea, January 2, 2019. REUTERS/Kim Hong-Ji

HONG KONG (Reuters Breakingviews) - Driving a hard bargain could backfire on Hyundai. The South Korean conglomerate’s auto-parts business has offered less than half the $2.2 billion in dividends wanted by pushy U.S. hedge fund Elliott Management. Meanwhile, Hyundai’s carmaker rejected another of the activist’s proposals. These stingier options may ultimately cost it investor support when it comes to a broader restructuring.

    The $18 billion Hyundai Mobis, which makes brakes and steering systems, on Tuesday unveiled a plan to hand back cash over three years, including 1.1 trillion won, or nearly $1 billion, in annual payouts. The company also nominated scion Euisun Chung to be co-chief executive and recommended two outside directors. Separately, the conglomerate’s crown jewel, Hyundai Motor Co, said it would keep its dividend at about $1 billion for the year.

    This sets the stage for a collision between the Chung family and Paul Singer’s feisty fund. Elliott, which disclosed a combined $1 billion stake last year in three Hyundai companies, is calling for more than twice as much in dividends at Mobis, and has put forward its own choices for the board. It is similarly asking for far higher shareholder returns at Hyundai Motor Co, including $4 billion in dividends. Shareholders in both companies will vote for the competing plans in a few weeks.  

    Elliott’s demands are excessive. Revenue at the struggling $27 billion carmaker, for example, is forecast to be flat this year, according to Refinitiv data, and the group is investing to keep up with rivals in new technology such as self-driving cars and hydrogen fuel-cells. That makes splurging on one-off dividends and buybacks unwise.

   Chung also has room to be more generous, though. Mobis is sitting on $6.6 billion of net cash. Its proposed 2 percent divided yield is lower than the average at South Korea’s top companies, CLSA analysts reckon, as well as at rivals such as Japan’s Denso.

    Moreover, shareholder unrest at Mobis, egged on by Elliott, already has forced Chung to shelve a broader cleanup of Hyundai’s chaebol structure. A significant protest vote, or losing to the rival plan, would make a fresh effort expected later this year even harder.

— Chung’s role has been corrected in the second paragraph of this item.


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