The $1.7 billion takeover brawl fueled by a fear of China

On one side is the 50-year-old Korea Zinc, led by Yun B. Choi, chairman and grandson of the co-founder, with officials arguing South Korea’s industrial strength is under siege. On the other is a South Korean private-equity firm headed by the country’s second-wealthiest individual, Michael ByungJu Kim, who has joined forces with the family of the other co-founder.

At the center of the dispute is Korea Zinc’s Onsan smelter in the city of Ulsan, South Korea, and the firm’s proprietary technologies. It is arguably a crown jewel of American hopes of creating a supply chain independent of China, which accounts for roughly half of the world’s refined zinc. Korea Zinc says it is asking Washington for backup.

Korea Zinc’s co-founders were friends turned business partners, who hailed from the same province in what is now North Korea. The firm’s name in Korean, Koryo Ayeon, uses a centuries-old name for the Korean state. Korea Zinc produces raw materials for cars, electric-vehicle batteries and semiconductors.

Kim, who is worth roughly $10 billion and moonlights as a fiction writer, sits atop his eponymous MBK Partners. He and his Seoul-based private-equity firm had long been praised locally for dealmaking prowess in South Korea. It owns a handful of Chinese companies and has a small contingent of Chinese investors. MBK, emphasizing its overwhelming ties and investments within both Korea and Japan, has promised to not sell Korea Zinc to the Chinese.

That pledge hasn’t toned down the rhetoric from Korea Zinc and its allies. They have labeled MBK as a corporate raider only interested in profits. Should MBK take control, a company official said this week, Korea Zinc’s core technology would be leaked overseas and South Korea’s industrial competitiveness would collapse. The company’s chief technical officer and senior engineers threatened to resign if MBK emerged victorious.

“MBK has the keys if they take over," said Kim Ki-june, an executive vice president at Korea Zinc. “They can hire anyone they want."

The showdown over Korea Zinc illustrates how the mere potential of technology shifting to Beijing can complicate dealmaking in once-sleepy corners of the global supply chain. Despite Western efforts, China’s advantage in minerals has only expanded, in everything from nickel to cobalt to lithium.

China’s mineral dominance

Korea Zinc declined to say if it had been successful in engaging U.S. assistance. In a disclosure Wednesday, the company said it had applied for “national core technology" status with the South Korean government for some of its technologies. The review takes about 15 days. If granted, government signoff would be needed if a foreign buyer ever emerges for Korea Zinc.

Western officials worry about Beijing’s ability to vex supply chains or create an uneven playing field by flooding the market with supply.

Washington can only do so much because China’s buying spree has spread from Africa to Argentina, while there are 50 entries on the U.S. critical mineral list and “protecting them all is impossible," said Hayley Channer, director of economic security for the United States Studies Centre at the University of Sydney in Australia. “One day it might be Korea Zinc, the next it could be any number of mining companies globally."

Two years ago, the U.S. and a number of allies, including South Korea, agreed to work together on efforts to diversify critical mineral supply chains. The coalition recently formed an alliance with financiers to better coordinate investments.

“The U.S. is taking it very seriously because it has realized the risks around overdependence on China for critical and strategic minerals," said Ian Satchwell, who advises governments, business and other organizations on minerals and energy policies.

Zinc is one of the minerals deemed critical by the U.S. Korea Zinc and its sister affiliate accounted for 8.5% of refined zinc output globally last year, according to Wood Mackenzie, a research and consulting firm. Refineries within China accounted for 49%.

The Seoul-based Korea Zinc also processes copper, nickel and other metals, and produces sulfuric acid, which is used by semiconductor manufacturers to clean wafers. It owns scrap-metal operations in the U.S.

Two families under one roof

Founded in 1974, Korea Zinc was added to the Young Poong conglomerate. The co-founders, who resided in South Korea before the 1950-53 Korean War, had both grown up in an area that is now part of North Korea. The split ownership, unique among South Korean conglomerates, became described as: “Two families under one roof."

But in recent years, a rift developed between Choi, the third-generation chairman of Korea Zinc, and Chang Hyung-jin, the son of the Young Poong founder. The disagreement centered on ownership control and board power. Chang and MBK have questioned some of Korea Zinc’s investments, corporate governance and profitability since Choi became chairman in 2019.

Young Poong, Chang and his family are Korea Zinc’s largest shareholder, with a combined stake of roughly 33%. But board power and management control largely rested with Choi.

To change that, Chang found a willing partner with MBK, one of Asia’s largest private-equity firms with more than $30 billion in assets under management. Together they would seek to amass a stake of up to 47.7% of Korea Zinc—enough clout to secure voting rights needed to eventually shake up the board.

MBK and Young Poong launched a $1.5 billion tender offer on Sept. 13, open to any Korea Zinc shareholder willing to sell. Since then, shares of Korea Zinc, which has a market capitalization of around $11 billion, have soared nearly 30%.

That prompted MBK on Thursday to raise its per-share offer to about $1.7 billion. The deadline for share sales ends Oct. 4. Whatever the offer brings in, Young Poong will split the final total stake with MBK, which will retain one additional share. MBK would assume management control if they succeed.

China controversy

The deal has brought unusual backlash to MBK and Michael ByungJu Kim, whom local media has praised for having a “Midas touch" in South Korea’s merger-and-acquisition industry. The 60-year-old Kim, whom MBK didn’t make available for an interview, founded the private-equity firm in 2005, after senior roles in Asia at Goldman Sachs and Carlyle.

Kim was born in South Korea but immigrated to the U.S. in his teens. A graduate of Harvard Business School, the Korean-American billionaire has interests that stretch well beyond finance. He owns a rare 18th century Bible and likes to read King Lear. He wrote a semi-autobiographical novel in the U.S., called “Offerings," which became a bestseller in the U.S. in 2020 and is set to become a Hollywood film.

Kim has also been a proponent of China’s promise. In his annual letter to investors, Kim questioned others who had retrenched from the country. “We are believers in China in the mid- to long-term," he wrote. “For now, it’s mostly Korea plus Japan for us. But China shall return."

Korea Zinc has argued that there is no way to forcibly stop MBK from making sales to China and that the risks of a critical technology transfer loom large. The mayor of Ulsan—where Korea Zinc has operations—recently called for each of the city’s 1.2 million residents to buy shares, so the firm avoids getting sold to a Chinese company in the future.

MBK, in the entirety of the firm’s existence, has never sold a Korean company to a Chinese buyer, said Kim Kwang-il, a MBK partner overseeing the Korea Zinc deal. Chinese entities make up less than 5% of MBK’s total investors. MBK expects to hold on to Korea Zinc for roughly a decade.

Young Poong and MBK claim some of Korea Zinc’s investments under Choi went through without board approval and raised corporate-governance concerns. For example, a private-equity firm run by a close friend of Choi’s attracted Korea Zinc funds and has focused on industries outside mining. Korea Zinc said major investments went through proper channels.

“Transferring core technologies to Chinese firms would hurt Korea Zinc," said Kim Kwang-il. “Private equity is about increasing the acquired firm’s value, and doing something that goes against that is unimaginable."