Activist fund takes aim at South Korean tobacco maker KT&G over dividends

A South Korean activist fund is pressing KT&G, the country’s largest tobacco and ginseng producer, to return about Won2.3tn ($1.86bn) to shareholders this year, piling pressure on the company ahead of its annual meeting in March.

Flashlight Capital Partners, a fund run by a former Carlyle Group executive, wants the company to triple its dividend payout, appoint two well-known Korean business leaders as outside directors and spin off its ginseng unit into a separate listing.

The fund said it would on Thursday submit the proposals to shareholders to vote on them at the meeting.

The months-long battle against KT&G will be the biggest activist campaign led by a domestic investor in South Korea against one of its biggest companies in terms of market value, in a country that has repeatedly resisted shareholder efforts to shake up its corporate sector.

Lee Sang-hyun, the former head of Carlyle Korea, claims that he has secured enough support to press for the changes at KT&G as most foreign shareholders, who own 44 per cent of the company, support his proposals. Big domestic investors including the state-run National Pension Service and Industrial Bank of Korea are also expected to vote for his reform measures.

Flashlight Capital, which is based in Singapore, has about a 1 per cent stake in KT&G and has held private talks with company executives about measures to boost its value since April, Lee said. Although the executives have shown a broadly positive response to the ideas, they have not taken action, he added.

“The company’s share price is still lower than that of 15 years ago. They seem to think that Carl Icahn is back,” Lee told the Financial Times, referring to a similar campaign by the US financier against KT&G in 2006. “They say they’ll do something some day. I waited for more than six months, but I haven’t seen any progress.”

“Koreans don’t like chaebol, but what they don’t like more than chaebol are foreign activist funds,” Lee said, referring to the family-run conglomerates that dominate the South Korean economy. “They have strong resistance against [activists] interfering with companies with so-called ‘owners’.”

KT&G, a former state monopoly known as Korea Tobacco & Ginseng, was privatised in 2002. The company, which has a market capitalisation of Won12.6tn controls 65 per cent and 70 per cent of the country’s tobacco and ginseng markets, respectively. The company posted Won5.2tn in 2021 sales.

In 2006, Icahn called for the company to boost its dividend, buy back shares and sell property. Icahn profited from the campaign after KT&G accepted many of his suggestions.

Lee wants the company to cancel all of its own shares, equivalent to a 15 per cent stake, and introduce quarterly dividends. He said KT&G was undervalued despite its Won6.8tn of liquid assets and estimated Won2tn of property. He also said KT&G’s lucrative ginseng unit should be listed separately to induce more long-term investment.

“The ginseng business has been overshadowed by its tobacco business. There are many overseas funds interested in the company’s ginseng business, but they cannot invest in it because of their ESG [environmental, social and corporate governance] principles against tobacco,” said Lee.

A proponent of the sector’s fast-growing “heat-not-burn” tobacco products, Lee said KT&G should try to make its popular “lil” cigarette alternative a global brand. He wants KT&G to appoint Cha Suk-yong, chief executive of leading domestic cosmetics group LG H&H, and Hwang Ou-jin, the former head of Prudential Life Insurance, as outside directors.

Big foreign shareholders in KT&G include US asset managers First Eagle Investment Management, Yacktman Asset Management, BlackRock and Vanguard as well as hedge funds such as Oasis Management and Tiger Global Management.

“We have always been attentive to comments and feedback from our shareholders and closely communicated with them,” KT&G told the FT.

The company said it would hold an investor conference on January 26 to outline growth strategies and “future-oriented” business portfolios to improve shareholder value.