[넘버스]Hanwha Group, What’s more important than’succession’ is’sharing’?

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As H Solutions recently bought a large number of shares in Hanwha Corporation, the issue of succession to Hanwha Group again attracted attention. H Solutions is a 100%-owned company by Dong-gwan Kim, President of Hanwha Solutions, Dong-won Kim, Managing Director of Hanwha Life Insurance, and Dong-sun Kim, Managing Director of Hanwha Energy. Together with Hanwha, it is located at the top of the group’s governance structure.

The business community is observing that succession work using H solution will continue. H Solution’s direct purchase of shares in Hanwha Co., Ltd. to increase its control, or a merger between the two companies are being discussed.

The purchase of H Solution’s shares of Hanwha Co., Ltd. can be seen as a move that puts weight on direct control rather than merger. Through this, H Solution’s stake in Hanwha Corporation increased from 2.2% in 2018 to 5.19%. Hanwha Corporation’s control of Hanwha Corporation is 12.97% by adding 4.44% of Hanwha Corporation’s shares held by President Kim Dong-gwan and 1.67% of Managing Director Kim Dong-won and Kim Dong-seon, respectively.

However, some have analyzed that mechanical succession may not be very difficult in practice. Rather than because the succession itself is difficult, the separation of business ownership between siblings in the future in addition to the financial and industrial separation and the holding judicial law is a real obstacle to succession.

Not long ago, in a conversation with a reporter, a domestic corporate governance expert said, “The separation of Geumsan is the core of the succession problem” and “I think that succession itself is still possible.”

Then, about how much stake do you need to acquire and how much money will it take to succeed in the actual stake?

Currently, the largest shareholder of Hanwha Co., Ltd., acting as the holding company of the group, is Chairman Seung-Yeon Kim, who owns 22.65% of shares (16.97 million common stock). Considering that the total share of the Hanwha Group’s three brothers plus the H Solution’s stake in Hanwha Corporation is 12.97%, the difference between Chairman Kim and the three brothers is 9.68%. It means that if the three brothers in the group own about 10% more shares, they can jointly exercise the greatest control over Hanwha Corporation.

The total number of common shares issued by Hanwha Co., Ltd. is 74.9 million,8735 shares, and the number of shares corresponding to a 10% stake is approximately 7.5 million. The price per share of Hanwha’s common stock reached a closing price of 32,150 won on January 29th. In order to secure a 10% stake at the current market price, about 240 billion won in cash is required.

Is 240 billion won in cash available to Hanwha Group’s three brothers? Of course, it is difficult to assess specific possibilities because there is no way to check the individual’s financial ability. It just makes an analogy based on the information given.

First of all, let’s take a look at the dividend trends in the recent years of H Solutions, which is owned by Hanwha Group’s three brothers 100%. According to the information disclosed in the Korea Corporate Assessment, H Solution began paying dividends in 2014 on a separate basis. In 2014 and 2015, we paid 7.5 billion won in dividends, respectively. Since 2016, the amount of dividend has increased significantly to 50 billion won. Cash dividends of 50 billion won in 2016 and 2017 and 40 billion won in 2018 and 2019 were distributed. From 2014 to 2019, the total amount of cash distributed by H Solution to Hanwha Group’s three brothers is KRW 1950 billion.

Of course, it is not known whether all the cash paid as dividends has been saved up to now, or whether it has been partially used, or whether it has been drastically called through investment. However, assuming that the scale has not changed without using it somewhere, it means that you only need to invest 50 billion won more to expand the 10% stake in Hanwha Corporation.

There are many ways to increase the stake even if the individual three brothers in the group do not directly acquire the stake. Just as H Solution purchased the shares, you can also purchase additional shares through borrowing. Or, you can donate some of the shares held by Chairman Seung-yeon Kim to the three brothers. Although there is a lot of gift tax, since it is more advantageous in terms of cost than direct equity acquisition, gifting is actually the most realistic and efficient method.

In accordance with the current inheritance tax and gift tax laws, stock gift tax is evaluated by averaging the closing price of stocks for a total of four months, two months before and after the gift date. If it exceeds 3 billion won, the highest tax rate, 50%, is charged, and if you add a 20% premium to the shares of the largest shareholder and the largest shareholder, you must pay 70% tax. If Chairman Kim donates 10% of his shares to his children, and the average price is 32,150 won on January 29, it is calculated that he will need 168 billion won in cash. Gift tax is also less burdensome as there is an annuity payment system.

In particular, the eldest son, President Kim Dong-gwan, who is attracting attention as a leading candidate for succession, seems to have room for personal funding. Hanwha Co., Ltd.’s’Mass Equity Holdings Report’ published on January 27 shows the details of collateral loans using Hanwha Corporation stocks. Chairman Kim has loaned 134 billion won using 10,196,000 common stocks as collateral. The second son, Kim Dong-won, and the third, Kim Dong-seon, spent 13.5 billion won and 19 billion won, respectively, using 1.25 million shares of the total stock held as collateral. Chairman Kim’s wife, Seo Young-min, also received a loan of 3 billion won with 180,000 stocks as collateral.

Only President Kim is not listed on the stock mortgage loan history. Considering that President Kim’s number of shares held by Hanwha Co., Ltd. There seems to be.

If the simple mechanical succession of Chairman Kim’s stock donation is not difficult, what is Hanwha Group waiting for? Of course, there is no reason to succeed right now. As Chairman Kim is expected to return to the front line of management soon this year, it may be judged that the time of succession has not yet arrived internally.

However, the argument that the real stumbling block is the separation of financial industry is more convincing. Hanwha Group’s governance structure is quite complex against other major conglomerates. Hanwha Corporation and H Solution control the rest of the companies through the companies located at the top of the two corporate governance structures.

If it converts to a holding company, there will be a problem of financial and industrial separation in which the holding company cannot own a financial company under the Fair Trade Act. When you switch to a holding company, you have to sell the financial company within two years. Hyosung Group sold Hyosung Capital after converting into a holding company.

Hanwha Group’s financial business is centered around Hanwha Life Insurance. As of the end of the third quarter of last year, Hanwha Corporation owned 18.15% and Hanwha E&C owned 25.09%. Hanwha Life Insurance is a financial intermediary holding company. It owns 100% of Hanwha Asset Management, Hanwha Insurance, Hanwha Life Asset, Hanwha Financial Asset, and Hanwha 63 City, and a 51.36% stake in Hanwha Insurance.

If you do not switch to a holding company, it is okay to maintain the current governance structure. However, the government is putting pressure on conglomerates to convert into a holding company, and as a result, the demand for financial and industrial separation is increasing.

If Hanwha Group separates financial and industry, it seems unlikely that it will be sold to a third party like Hyosung. The financial business is one of Hanwha Group’s core businesses and is a flagship business that generated close to KRW 1 trillion in profits in 2017 alone. Rather, it can be seen that it is highly likely to pass on to the successor through division of the series.

However, it is not as easy as it sounds to concentrate 43.24% of Hanwha Life Insurance’s shares held by Hanwha Co., Ltd. and Hanwha E&C into a single company or privately owned. As a result, it is necessary to deviate from Hanwha Corporation’s governance structure and form an independent governance system. If possible, it is expected that it will have to go through a fairly difficult process. Hanwha Life Insurance has a consolidated market capitalization approaching KRW 150 trillion, so it seems difficult to exchange stocks.

Most of all, it is difficult to see this financial and industrial separation issue apart from the divisional separation that may occur in the future. If Hanwha Group maintains its current governance structure and continues to expand its control over Hanwha Corporation through H Solutions, the succession itself will not be a big problem. However, this means that the ownership of Hanwha Group is concentrated on the eldest son, Dong-gwan Kim. It has 50% control over H Solutions and Hanwha Co., Ltd. has a 4.44% stake, which is more than the total of 3.34% of Hanwha Corp.

Traffic control between siblings seems to be the most important issue for Hanwha Group. In fact, Chairman Seung-yeon Kim has experience in litigation with his former brother, Ho-yeon Kim, former Chairman of Binggrae in connection with the division of property rights. If you look at past articles, in 1993, Chairman Kim made an open declaration, saying, “I will break the relationship between my brothers.” Eventually, former Chairman Kim Ho-yeon’s Binggrae was separated from Hanwha Group in 1992 and became officially independent by the Fair Trade Commission in 1998.

From the outside, it seems that Hanwha Group will have a lot of thoughts about succession internally. This is because not only expanding dominance but also various variables must be considered comprehensively. I am interested in what kind of trick Hanwha Group will be able to smoothly complete the succession process in the future.