Namyang deal to test Hahn & Co.'s ability to manage ESG risks

Namyang deal to test Hahn & Co.'s ability to manage ESG risks

A pedestrian passes by Namyang Dairy Products headquarters building in Seoul, Friday. Yonhap

Buyer tasked with restoring stock price, customer trust

By Park Jae-hyuk

Hahn & Company’s latest decision to acquire a controlling 53 percent stake in the scandal-ridden Namyang Dairy Products from its former chairman, Hong Won-sik, and his family members appears to be testing once more the domestic private equity firm’s (PEF) capacity to manage risks of its portfolio companies in terms of environmental, social and corporate governance (ESG) factors.

Following their share purchase agreement disclosed after the closing of Thursday’s trading session, Hahn & Co. announced it would introduce an “executive officer system” to Namyang to reform the governance structure of the dairy firm that has been managed by its owner family for 57 years.

The purpose of the system is to separate a company’s board of directors in charge of decision-making and supervisory functions from executive officers in charge of business execution functions, so as to enhance responsible management.

Hahn & Co., which is known as the nation’s first PEF that introduced the system to its portfolio companies, has mentioned this as its most significant ESG strategy that has been pursued since several years before the sustainability standards became popular in Korea.

All eyes are therefore on whether the buyer will be able to fulfill its promise of reshaping Namyang for the company to regain the trust of consumers and dealers through aggressive investments and transparent management.

“This marks our continued belief in the attractiveness of the Korean market despite headwinds presented by the current pandemic,” Hahn & Co. CEO Hahn Sang-won said in a press release. “Namyang is a franchise consumer brand in Korea with compelling opportunities to further expand and strengthen its brand.”

The dairy firm has been struggling for several years with a nationwide boycott of its products in light of reports of misconduct by its owner family members and abusive practices against sales agents.

In April, the company was embroiled in controversy for announcing that Bulgaris yogurt drinks were supposedly effective against COVID-19. After the government sanctioned the firm for violating of the Act on Labeling and Advertising of Foods, its owner made an apology and resigned as chairman earlier in May, amid worsening public sentiment.

Namyang deal to test Hahn & Co.'s ability to manage ESG risks

An electronic signboard in the Yonhap Infomax head office in Seoul shows the stock price of Namyang Dairy Products, Friday. Yonhap

With these unfavorable factors, Namyang’s stock price had remained sluggish until the announcement of the recent acquisition deal. Given its market capitalization was around 310 billion won, Thursday, the size of the contract was initially presumed to be around 250 billion won, before its details were disclosed.

Although some market insiders regarded the price of the owner family’s shares as quite overestimated, the company’s market capitalization jumped to 410 billion won, Friday, as its stock price hit the daily ceiling of 570,000 won. The recent acquisition deal therefore seems to have had a positive impact on shareholder value.

Hahn & Co., however, is still tasked with overcoming negative consumer sentiment on PEFs, which they see as “speculative capital funds.” Some of them claim the boycott should continue regardless of the change in ownership.

There is also speculation about a call option in the deal, which would enable the seller to repurchase sold shares after a certain period of time, but industry officials said the chances are slim for the seller to take the risk of facing public criticism once again.

In a letter to Namyang employees, the former owner said the recent decision was made to satisfy them and to raise the valuation of the company.

“I just sincerely hope to get together with the Namyang Dairy Products family one day,” he said in the letter.

Hahn & Co. will make its payment no later than Aug. 31. The largest shareholder of Namyang will change once the payment is complete.

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