The Background Behind Daeyang Metal Acquiring Youngpoong Paper Below the Standard Price

[Asia Economy Reporter Hyungsoo Park] Stainless steel cold-rolled sheet manufacturer Daeyang Metal is acquiring paper company Youngpoong Paper.

According to the Financial Supervisory Service's electronic disclosure system on the 15th, Daeyang Metal will acquire 11,221,730 shares (50.55%) of Youngpoong Paper for 128.9 billion KRW. A deposit of 12.9 billion KRW will be paid, and the contract will be finalized upon payment of the balance on October 14.

Daeyang Metal explained that it is acquiring Youngpoong Paper to enter a new business and strengthen its business capabilities.

Daeyang Metal set the acquisition price per share of Youngpoong Paper at 11,488 KRW, which is lower than the previous day's closing price of 13,050 KRW. Due to the below-expectation sale price, Youngpoong Paper's stock price fell below 10,000 KRW on the same day.

Youngpoong Paper produces paper cores and linerboard for corrugated boxes, which are raw materials for chemical fiber and cotton yarn industries. Since the mid-2000s, the linerboard industry has been reorganized mainly around five large companies?Shindaeyang Paper, Asia Paper, Sambo Paperboard, Taelim Packaging, and Korea Export Packaging?through mergers and acquisitions (M&A). By establishing vertical integration from base paper to paperboard and boxes, base paper companies flexibly reflect raw material price fluctuations in product prices.

Donghyun Accounting Corporation evaluated the appropriateness of Daeyang Metal's acquisition price for Youngpoong Paper. The market price for the listed company Youngpoong Paper was calculated at 13,502 KRW according to the Enforcement Decree of the Capital Market and Financial Investment Business Act. This is the average of the volume-weighted arithmetic average prices over the past month and week, and the most recent closing price, based on the day before the contract signing, the 13th.

In share transfer contracts involving acquisition of management rights, it is common to add a control premium to the base price. However, the control premium is influenced by various factors such as shareholding structure, the acquirer's future business plans, and price adjustments between parties. Donghyun Accounting Corporation analyzed major shareholder change contracts with transfer amounts exceeding 30 billion KRW over the past three years. The simple average control premium rate was 43.78%, with minimum and maximum premium rates of -40.69% and 224.08%, respectively. The per-share valuation reflecting the control premium was calculated to be between 8,007 KRW and 43,757 KRW.

Daeyang Metal's ability to acquire more than 50% of shares at a price lower than the base price is likely influenced by Youngpoong Paper's profitability. Youngpoong Paper's sales increased by 22.9% year-on-year last year, benefiting from increased demand for delivery boxes due to the COVID-19 pandemic. However, operating profit decreased by 20.7%. Asia Paper and Sambo Paperboard saw operating profits increase by 42.9% and 49.9%, respectively, last year. Sambo Paperboard's profit rose due to increased product sales volume and price hikes.

In the first quarter of this year, Youngpoong Paper recorded sales of 28.2 billion KRW and operating profit of 2 billion KRW. Sales slightly decreased year-on-year, and operating profit fell by 40.8%. The price of raw material corrugated base paper per ton rose 17.3% from 186,846 KRW last year to 219,090 KRW. During the same period, linerboard prices increased by 11.1%.

The continuous decline in stock prices of major companies such as Asia Paper and Sambo Paperboard likely worked in favor of the buyer. Their stock prices have fallen 31.2% and 37.3%, respectively, since the beginning of this year. This is interpreted as a result of increased market volatility and a growing desire to realize profits from COVID-19 beneficiary stocks.

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