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KT&G headquarters in southern Seoul. Korea Times file

By Lee Kyung-min

Flashlight Capital, a Singaporean activist private equity fund, has recommended Korean cigarette manufacturer KT&G spin off its ginseng business for a stock listing, in a critical step toward recovering corporate value amid a growing global trend toward environmental, social and corporate governance (ESG) considerations, according to market watchers, Wednesday.

The fund with a stake of about 3 percent in the firm made recommendations including reorienting its investment portfolio to streamline non-core businesses of 2 trillion won ($1.4 billion), fortifying its shareholder return policy and enhancing activism-oriented ESG values. Also included was the need to establish a medium- to long-term plan to elevate Lil, a heat-not-burn (HNB) cigarette developed by the firm, as a key growth driver.

The new strategy, according to Lee Sang-hyun, founder of the fund and the former head of Carlyle Korea, a global alternative asset manager, will lift the firm's recently rocketing share price from around 92,000 won further to its previous high of about 140,000 won in 2016.

Market watchers differentiated the recommendation from a threat of tender offer followed by hostile takeover attempts in the early 2000s, led by U.S. billionaire Carl Icahn. The billionaire with the help of hedge fund managers netted 148.2 billion won in stock gains after acquiring over 6 percent of KT&G to demand a sell-off of its key assets, disclosure of corporate accounting data and key information on its ginseng business.

Interests aligned

"The interests of investors, executives of the firm and shareholders will lead to explosive growth in the years to come," Lee said in a letter to KT&G's foreign shareholders.

Making Lil account for half of the firm's sales instead of cumbustible cigarettes will, the fund says, make great contributions to enhancing the value of health, a key ESG consideration equally critical as the ginseng spin-off.

The listing will identify a new growth opportunity for struggling local farmers in the global market, thereby bolstering the social value of the industry.

Providing stock options to firm executives will help advance the objectives, incentivizing them to strengthen commitment to bolstering ESG goals.

The price of KT&G closed at 92,800 won, up 3.8 percent from the previous session, in an upward trajectory since July 6, when it hit a low of 80,100 won.

KT&G, which was privatized in 2002, said it is open to the recommendation. "We always maintain close communications with shareholders and are open to reasonable suggestions and opinions," the firm said. "We will look into the recommendation and take it under careful consideration."