South Korean private equity house Korea Corporate Governance Improvement appears to be in a predicament as its hostile takeover bid for Hanjin KAL is being overshadowed by the Korea Development Bank’s tighter control over the parent company of flag carrier Korean Air Lines.

This comes as a KCGI-led consortium, which took issue with the “poor governance” displayed by the transportation group’s owner family and sought to bring in professional managers to replace incumbent Hanjin KAL Chairman Cho Won-tae, is seeing the KDB tackle the group’s governance instead by creating an independent committee and bringing in unnamed outside professionals.

The KDB’s announcement Wednesday, in accordance with a 2020 pledge and proposal to acquire 10.66 percent voting rights in Hanjin KAL, is in line with Korean Air’s post-merger integration plan as Korea’s No. 1 aviation firm looks to take over debt-saddled rival Asiana Airlines by the first half with a KDB-led financing scheme. Korean Air announced last week that it has completed raising 3.3 trillion won ($2.9 billion) from shareholders, and half of the proceeds will be used to acquire Asiana.

In the meantime, the consortium -- which holds approximately 40 percent voting rights in Hanjin KAL -- is wrestling to ramp up its control over the company, as it failed to keep at bay the KDB’s 800 billion won funding plan in exchange for 10.66 percent voting rights in Hanjin KAL and exchangeable bonds. The KCGI-led group’s court injunction against the KDB-backed plan was dismissed in December, which paved the way for the KDB’s capital injection.

Following the defeat, the investor group in February stopped short of submitting the shareholder proposal by the deadline for its shareholder meeting scheduled March 26. 

KCGI’s history of shareholder activism dates back to late 2018.

KCGI first emerged as a blockholder of Hanjin KAL in November 2018. The PEF disclosed that it had a 9 percent stake in the company and said it intended to engage in the company’s management.

In March 2019, as a shareholder with 12.7 percent control, KCGI opposed the extension of incumbent Chief Executive Officer Suk Tai-soo’s term. Shareholders at the meeting turned down KCGI’s proposal and approved another three-year term for Suk.

KCGI’s shareholder activism reached a high point in 2020 when it joined hands with estranged heiress Cho Hyun-ah and Bando Construction, after heir Cho Won-tae succeeded his father as head of the business.

The KCGI-led coalition’s proposal to oust Cho Won-tae was turned down at the March 2020 shareholder meeting. Even after the defeat, the KCGI-led group scrambled to buy more Hanjin KAL shares, so that by June 2020 its voting rights reached 45.23 percent, giving it more power than Chairman Cho and his allies.

But Hanjin KAL’s share offering to the KDB diluted the KCGI consortium’s control to as low as 40.39 percent as of December.

On the other hand, the question arises as to how the consortium of KCGI, Cho Hyun-ah and Bando Construction can weather challenges including Cho Hyun-ah’s cash shortage.

Her 60 billion won inheritance tax bill, due in annual installments over five years, piles pressure on the estranged heiress, who has reportedly remained jobless since 2018. A recent filing showed that Cho Hyun-ah on March 8 sold 55,000 shares to KCGI for 3.4 billion won, out of the total 3.8 million shares under her control.

By Son Ji-hyoung (consnow@heraldcorp.com)