[At the Crossroads] PeopleBio ① In Deep Trouble After Inflated Acquisition of "Empty Shell" Real Estate

Acquisition to Avoid Capital Erosion Brings New Troubles
Interest Payments Outpace Rental Income, Blocking Resale
PeopleBio Shoulders All Risks While Major Shareholder Profits

KOSDAQ-listed company PeopleBio has found itself in a predicament after acquiring an "empty shell" building—one in which interest payments exceed rental income—at a high price. The company purchased the property as an emergency measure to avoid capital erosion, but is now in a situation where selling at a low price or canceling the contract is difficult. Controversy is also expected due to the structure of the deal: although PeopleBio is saddled with losses, the largest shareholder, who sold the building, is positioned to profit from the transaction.

On August 14, according to the Financial Supervisory Service's electronic disclosure system, PeopleBio disclosed that, on December 24 of the previous year, it had entered into a contract to acquire the 'Dugak S Hall' building, located in the academy district of Daechi-dong, Gangnam-gu, Seoul, as well as a multi-family house directly behind it, for 98.3 billion won. PeopleBio issued perpetual convertible bonds (CBs) worth 35.6 billion won as a substitute payment for the contract deposit and down payment.

This deal allowed PeopleBio to escape the risk of delisting. At the time, PeopleBio’s capital erosion rate exceeded 62 percent. KOSDAQ-listed companies are designated for special management if their capital erosion rate exceeds 50 percent and, if this persists, are subject to a substantive delisting review. By issuing "perpetual CBs recognized as equity" under the guise of a building purchase deposit, the issue of capital erosion was resolved.

However, the property is considered a loss-making "empty shell" building immediately upon acquisition. The annual revenue generated by the property totals 2.74 billion won. However, a total of 62.7 billion won in primary mortgage loans has been set against this property. Even at just a 5 percent annual interest rate, this amounts to 3.135 billion won in interest expenses. More recently, as the mortgage lender was changed from Woori Bank to Saemaeul Geumgo, it is estimated that the interest rate has risen even further.

Furthermore, the perpetual CBs used for the deposit carry an interest rate of 2 percent, so if PeopleBio fully acquires the property, it will spend nearly 4 billion won each year on interest payments. This results in an annual loss of about 1.3 billion won.

The probability of rental income rising significantly in the near term is also low. Currently, the 'Dugak S Hall' building has been leased in its entirety to Gangnam Daeseong Academy, with the contract running until 2031. For the next five years, increasing rent is difficult due to the terms of the contract.

This has led to questions within the market as to how the property's value was appraised at 98.3 billion won. In fact, PeopleBio's largest shareholder, 'Human Data', which sold the property, had previously set the book value of this real estate at 80.2 billion won as of the end of September last year. The building was sold to PeopleBio for 18.1 billion won more just three months later. Moreover, Human Data is also positioned to earn additional interest income from the CBs.

Amid such controversy, PeopleBio has announced plans, just a few months later, to once again sell the building. The 'Dugak S Hall' is reportedly being offered for 120 billion won. However, as the building is loss-making upon acquisition, it appears there are very limited prospects for a sale.

It is also difficult for PeopleBio to lower the selling price of the property. Should the building be sold, just months after acquisition, for less than the purchase price, it could be interpreted that PeopleBio’s management caused losses for the company, raising the risk of a breach of fiduciary duty. This, in particular, is heightened due to the related-party transaction with Human Data, so it is likely that the financial regulators will scrutinize the matter even more closely.

Canceling the initial sales contract entirely would also entail significant risks. As PeopleBio has already issued perpetual CBs and disclosed the acquisition of a tangible asset, it could be classified as a noncompliant disclosure entity. In fact, last March, PeopleBio received 7 demerit points for withdrawing a rights offering and change in management. KOSDAQ-listed companies accumulating 10 or more demerit points may become subject to a substantive listing eligibility review. Furthermore, if the transaction is deemed a sham contract intended to avoid capital erosion, it could be treated as a fraudulent transaction.

Regarding this, a PeopleBio representative stated, “Since the building is a stable, income-generating asset located in the Daechi-dong academy district, it is not an empty shell property,” adding, “There is potential to expect higher rental income after the lease agreement with Daeseong Academy expires.” The official continued, “This transaction was conducted based on valuation amounts from two reputable appraisal agencies.”

This content was produced with the assistance of AI translation services.