MBK–Youngpoong Corporation’s Korea Zinc Call Option: Far from Making Shares Cheaper, the Price Rises 5% a Year [fn Market Watch]

[Financial News]  MBK Partners has hit back at the controversy over claims that a call option on Korea Zinc shares agreed with Youngpoong Corporation would lower the average purchase price.
MBK says the call option cannot be exercised before the investment is exited, and that the strike price rises every year. As the control dispute drags on, the two sides’ dispute is expanding beyond the share purchase price to the contract’s economic substance.
According to investment banking (IB) industry sources on the 9th, MBK Partners has refuted claims recently made by some online media that the call option would lower the average purchase price of Korea Zinc shares, calling them a distortion of the contract terms.
The key issues are when the call option can be exercised and how its price is calculated. MBK says it will not exercise the option until it has exited its investment in Korea Zinc. It argues that the very premise of exercising the option now to lower the purchase price does not hold.
The actual strike price is not fixed. The base price is 700,000 won per share, but 5% is added each year until exit. The longer it takes to recoup the investment, the higher the price required to exercise the option.
All dividends paid before the call option is exercised go to Youngpoong Corporation. MBK says Youngpoong has also secured a put option allowing it to sell shares using the same pricing formula. The options are designed to have both sides share the risk of price fluctuations, it says.
The issue in this controversy is seen as lying less in the simple acquisition price of the shares than in the option exercise conditions and the timing of the investment exit. In particular, since the strike price rises over time, the actual economic effect may vary depending on Korea Zinc’s share price at the eventual exit and the conditions for exercising the option.
MBK claimed that the camp of director Choi Yun-beom was distorting the contract’s economic effect based on a hypothetical scenario that had not materialized.
MBK also raised again questions about the director’s camp’s past investments and management of funds. It claimed that at least 1.6 trillion won in borrowing burdens had arisen in the course of defending management control, and that an investment worth 79 billion won through the One Asia fund had also caused losses for the company.
Some in the IB industry say the dispute is turning into a debate over the investment exit structure, alongside the prolonged control dispute at Korea Zinc.
Some point out that assessing the actual economic effect of the call option requires looking not only at when it is exercised but also at the contract’s price adjustment mechanism and the put option terms.
An IB industry source noted, “It is difficult to assess the economic effect of a call option based on the base price alone,” adding, “To understand the actual investment return structure, one must consider together the price increases accumulated by the time of exercise, the allocation of dividends, and the put option terms.”


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