Head-on Collision between MIC and LG over Hanaro

After Information and Communication Minister publicly announce that the government will support Hanaro Communications to attract foreign investment, the largest shareholder of the company, LG Group pledged to counter the efforts.

LG Group has bought 5 million Hanaro shares to increase its ownership from 15.89% to 17.7%. Although LG had enough shares to reject Hanaro`s foreign investment attraction plan, it purchased more to make sure the cancellation of the scheme.

Meanwhile, the buying spree of LG has hiked Hanaro share prices to 4,250 won, its highest level in the year.

Minister Chin had officially taken a neutral attitude over the issue. But he changed his course to express his support for Hanaro, citing the need for the introduction of competition in the communications markets. He criticized LG Group, saying "LG`s purchase of Hanaro stocks has improved liquidity of the ailing firm. But LG is now attempting to take over the company for nothing."

If the upcoming Hanaro shareholder`s meeting votes down the foreign investment plan on October 21, the communications ministry plans to put the company under court receivership and let its court-appointed custodian attract foreign investment.

Minister Chin added, "Although the ministry has no intention to intervene in a dispute between companies, it is natural for me, as a cabinet member, to favor foreign investment. The prospective foreign investment of 1.3 trillion won (500 million in foreign investment plus 600 million won in syndicate loan), which would be the record amount of foreign investment into Korea, will also enhance the nation`s credit rating."

Both Samsung Electronics and SK Telecom have been supporting the plan.

Buying massive Hararo shares, LG Group shows its willingness to confront the government head on. The company said it is making utmost efforts to vote down the plan.

If LG is to remains to be Hararo`s largest shareholder and prevent the firm from being put under court receivership, LG has to pay off Hararo`s 236 billion debts, which would be mature by November and December, while issuing and selling new Hararo shares. But it is remains to be seen whether LG would repay the debt, since there is no guarantee that the issuance of new stocks will be materialized.

The communications industry predicts that LG will first break down the foreign investment plan and then come up with a compromise measure between the issuance of new shares and foreign investment.

Situations are developing against LG. As Minister Chin makes clear his position, Hanaro Communications decided to sign a contract New Bridge and AIG Consortium, agreeing to pay $2.5 million (about 3 billion won) in penalty, in case the foreign investment plain is not passed during the upcoming shareholders` meeting.

The Korea Development Bank governor Yoo Ji-chang also started pressuring LG throwing his support behind the foreign investment attraction plan.

Seong-Yub Ra cpu@donga.com