Youngpoong Corporation, MBK Partners’ Korea Zinc options: Stake won’t transfer even after two years [fn Market Watch]

[Financial News]  The key to the management cooperation agreement between Youngpoong Corporation and MBK Partners concerning Korea Zinc is said to lie in its two-way options structure, rather than a simple share sale. The agreement gives MBK Partners a call option to buy Youngpoong Corporation’s stake, while also giving Youngpoong Corporation a put option to require the sale of its stake. In particular, exercise of the call option is restricted until MBK recoups its investment, so the stake does not automatically transfer simply because two years have passed since the agreement was signed, according to Youngpoong Corporation.
According to the investment banking (IB) industry on the 19th, Youngpoong Corporation recently explained these terms of the options in its management cooperation agreement with MBK Partners. The call option can be exercised only after additional requirements are met, even once a specified period has elapsed, and it has not been exercised to date, the company said.
The key point is the pricing formula that applies when the options are exercised. The put option held by Youngpoong Corporation and the call option held by MBK are both subject to an annual addition of 5% based on 700,000 won per share. Rather than compounding, the price rises by 35,000 won per share each year.
Accordingly, the exercise price rises to 770,000 won per share after two years, and reaches 1.05 million won per share after 10 years. This means Youngpoong Corporation has secured a mechanism to require the sale of its stake at the agreed price even during a downturn in the share price, provided the contractual requirements are met.
Dividend income is separate. Youngpoong Corporation can receive dividends on its stake until the option is exercised. For example, assuming dividends of 20,000 won per share annually for two years, the 770,000-won exercise price plus 40,000 won in accumulated dividends would result in a cash inflow of 810,000 won per share.
This explanation also touches on the controversy over the difference between Korea Zinc’s tender offer price and the options’ base price. Youngpoong Corporation’s position is that the actual financial gain or loss cannot be assessed by comparing only the final tender offer price with the initial option base price. Its argument is that the additions tied to the exercise date, dividends, and the downside protection provided by the put option must also be taken into account.
However, a higher option price does not mean that an actual investment return is guaranteed. Youngpoong Corporation’s economic benefit can be assessed only by considering the option exercise requirements and timing, the actual cost of acquiring the shares, and the time value of money.
IB industry observers say the key point to watch in this agreement is not the option base price itself, but when the options can actually be exercised and the conditions for transferring the stake. This is because the fate of Youngpoong Corporation’s stake could also be determined in conjunction with MBK’s process of recouping its investment in Korea Zinc.
An IB industry source said, “The key to this agreement lies not in the option base price but in the actual timing and conditions for exercising the options,” adding, “The longer it takes MBK to recoup its investment, the higher the agreed sale price for Youngpoong Corporation’s stake will be, so it is worth looking at the future exit strategy and the structure for transferring the stake together.”
[email protected] Kim Kyung-a Reporter