Hyundai Sells Subsidiary to Prudential

Hyundai Investment and Securities Co. signed a memorandum of understanding with Prudential Financial, a U.S. financial company, announced the Financial Supervisory Service yesterday. In the memorandum, Hyundai Investment Securities is to sell its subsidiary Hyundai Investment Trust Management Co. to Prudential Financial for 500 billion won (or, approximately $400 million).

With its subsidiaries sold off separately, Hyundai Securities will hold a bid to find its buyer.

Now three Hyundai financial companies are to be "disposed" of in the near future, the whole financial industry is expected to undergo an overhaul soon.

The Financial Supervisory Service plans to curtail the capital of Hyundai Investment Trust, and pour in the public fund. Then, it is to sell 80% of the company`s shares to Prudential for 500 billion won.

The sales price and the amount of the fund to be added may vary depending on the final agreement.

As of last year, Hyundai Securities spent 1.4 trillion won of its total capital. Yet, it is believed to sustain another loss in the amount of 400 billion won. Thus, industry experts predict, the government has to throw in two trillion won worth of taxpayers` money.

"The memorandum agreed upon this time is not legally binding. Nonetheless, both parties are positive toward consummating the deal. They will reach an agreement in the near future," said FSS senior official Lee Doo-hyung.

With Hyundai Securities about to be sold off, major shareholders will have to watch their shares turn to sheets of paper. Minority shareholders also have to lose some or all of their shares in the process of capital reduction.

Lee confirmed, "Majority shareholders will lose it all. As to minority shareholders, we have not made any final determination. The decision will come out later."

But he indicated that they would possibly lose all by saying, "Prudential wants a streamlined structure for shareholders." In other words, all shareholders of Hyundai will retain nothing. Prudential and the government would then most likely cut shares so that 80% goes to the former and the rest to the latter. If this should happen, minority shareholders will show their distain.

As to Hyundai Investment Trust Management, the government would not cough up any taxpayer money. Instead, Prudential is supposed to acquire it through its purchase of its mother company Hyundai Securities.

In addition, for the next three years to come, Prudential will retain the call option for 20% of the shares that are supposed to be held by the government.

The government will conduct further negotiations with Prudential to set the terms and conditions of the main contract. Moreover, the Public Fund Oversight Committee has to approve the deal.

"Both parties wish to cut a final deal as early as possible. Aside from the main contract, we will engage in separate negotiations with Prudential for sale of Hyundai Securities," opined Lee.

"We are targeting life insurance and asset management markets in Korea. We will expand our business in the latter market," said the CEO of Prudential, in a telephone interview.

The South Korean government last negotiated the sale of Hyundai with AIG in January of 2002, which had previously failed.

Dong-Won Kim daviskim@donga.com