Poongsan Group Chairman Ryu Jin / Courtesy of Poongsan Group

By Park Jae-hyuk

Poongsan is facing a growing backlash from minority shareholders over its plan to split off its flagship munitions business so the parent firm can focus on copper product manufacturing, according to industry officials, Friday.

Earlier this month, Poongsan abruptly announced the split-off plan for Poongsan Defense, arguing that the structural reform will ultimately enhance both the company's enterprise and shareholder values. It emphasized that its enterprise value has been underestimated due to the trend of global institutions shunning investments in the arms industry amid the growing importance of environmental, social and corporate governance (ESG) criteria.

However, Poongsan has faced speculation that it decided to push ahead with the split-off to preemptively avoid a forthcoming financial regulation, because its announcement was made a few days after the government unveiled plans to protect minority shareholders of companies that split off their lucrative businesses to be listed on the stock market. There has been a tendency that a parent firm's stock price declines after listing a new subsidiary that was split off from the parent.

Poongsan's headquarters in Seoul / Courtesy of Poongsan

In response, a group of Poongsan's minority shareholders opened a website earlier this week protesting the company's plan.

They have been trying to acquire a 0.5 percent stake to make a shareholder proposal that Poongsan would have to carry out a spin-off instead of the planned split-off. A spin-off distributes shares of a new subsidiary to existing shareholders.

Poongsan's minority shareholders also joined hands with the minority shareholders of DB HiTek and Korea Shipbuilding & Offshore Engineering (KSOE). DB HiTek is rumored to be considering splitting off its semiconductor design unit. KSOE finished splitting off Hyundai Heavy Industries and listed the shipbuilding subsidiary on the stock market last year.

According to Poongsan's regulatory filing, Poongsan Defense will not be listed on the stock market.

Investors, however, appear to be skeptical of the promise, given that the company's stock price fell below 28,000 won ($20) from above 30,000 won after its announcement of the planned split-off.

"Poongsan is highly likely to break its promise in the future, so the market has remained skeptical about its value," Korea Stockholders Alliance leader Jung Eui-jung said. "Minority shareholders should be up in arms against major shareholders."

A Poongsan spokesman said that the company will make efforts to convince the minority shareholders.

"We plan to hold a meeting with them next month," he said. "We already held a conference call with securities analysts and received positive reviews from them."

NH Investment & Securities analyst Byun Jong-man ruled out the possibility of deterioration in Poongsan's enterprise value at this moment, saying that the parent firm will hold a 100 percent stake in the new subsidiary, which will remain unlisted.

Hyundai Motor Securities analyst Park Hyun-wook also supported Poongsan, saying that the company plans to specify in its articles of association that the new subsidiary cannot be listed on the stock market, unless the parent firm's shareholders agree.