MBK: "Cannot Exercise Call Option... Price Also Rises Every Year"

Cannot Be Exercised Until the Investment Is Recouped
Exercise Price Rises 5% Annually; Dividends Go to Young Poong

In an agreement signed two years ago with Young Poong to secure control of Korea Zinc, MBK Partners set the exercise price for a call option on Young Poong's Korea Zinc shares at 700,000 won per share. However, the price increases by 5% each year, and the option cannot be exercised until the investment in Korea Zinc has been recouped, it has been confirmed.

According to investment banking (IB) industry sources on October 19, the terms were included in a management cooperation agreement signed in September 2024 between MBK Partners, through its special-purpose company Korea Enterprise Investment Holdings, and Young Poong and its advisor, Chang Hyung-jin.

The exercise price initially agreed upon by the two sides was 700,000 won per share. The price was originally linked to the tender offer price, but was changed to increase by 5% each year as the tender offer price was raised in the contest against Korea Zinc Chairman Choi Yun-beom and his side. At the time, the tender offer price rose from 660,000 won to 830,000 won.

Some analysts said this arrangement could allow MBK to secure stable capital gains from both the higher tender offer price and a rise in Korea Zinc's share price. A simple calculation of the difference between Korea Zinc's closing price of 946,000 won on October 16 and the initial call option exercise price of 700,000 won, multiplied by the 2,444,546 shares subject to the option, comes to 601.4 billion won.

MBK, however, said such capital gains would be difficult under the contract, which provides for the exercise price to rise each year. "The price increases by 5% annually, bringing the call option exercise price to 770,000 won per share after two years, and the longer it takes to exercise the option, the higher the price becomes," MBK said. "The contract also includes downside protection: even if Korea Zinc's share price falls, Young Poong can require the shares to be sold at the agreed price in accordance with the contractual terms. In addition, all dividends received before the call option is exercised belong to Young Poong."

MBK added, "If the investment lasts 10 years, the exercise price will exceed 1 million won per share, and the call option cannot be exercised until the investment has been recouped. The put option held by Young Poong is subject to the same pricing structure."

Its position is that it is not reasonable to assess Young Poong's economic benefits or harm to shareholders by comparing only the final tender offer price with the benchmark price, without taking the detailed terms into account.

Meanwhile, KZ Precision, a Young Poong shareholder aligned with Korea Zinc Chairman Choi Yun-beom, has filed a shareholder derivative lawsuit, arguing that the agreement entered into by Young Poong's management is detrimental to the company. The key issues are expected to include the change to the call option price, how it was calculated, and the circumstances surrounding Young Poong's board decision.

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