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January 17, 2006 10:03 pm

Icahn faces unusual set of challenges

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Carl Icahn could be forgiven for thinking he has seen it all in business.

In a career spanning several decades, the shareholder activist and corporate raider has taken on icons of American capitalism such as the food group RJR Nabisco and the airline TWA, and come out on top more often than most.

But if he really does try to shake up KT&G, South Korea?s largest tobacco and ginseng producer, he may find he faces an unusual set of challenges. KT&G is a former state-owned monopoly that still commands more than 75 per cent of the domestic market.

Although KT&G was privatised at the end of 2002, and foreign investors own more than 60 per cent of the company, it will not be easy for Mr Icahn to influence management of KT&G ? which is still seen as a public company given its dominant position in the cigarettes market.

In the highly-liquid, fast-moving US capital markets Mr Icahn has often targeted management with demands for change and resorted to going directly to shareholders if rebuffed.

But in South Korea, ?proxy fights? such as the one Mr Icahn has launched against Time Warner are difficult to pull off.?Although a large part of the Seoul stock market is owned by international fund managers, South Korean companies have a tendency to close ranks and hide behind each other when confronted by foreign activists.

Samsung Electronics is one of the country?s most successful companies and the jewel in the Samsung chaebol empire. It took a 1.4 per cent stake in 2004 for Won117bn ($118m) in SK Corp, the country?s largest oil refiner, which was in the middle of a management tussle with Dubai-based Sovereign Asset Management, acting as a ?white knight? for SK Corp.

The Dubai-based investor gave up its attempt to reform corporate governance practices at the South Korean oil refiner, after a lengthy battle against the family-run empire. Sovereign tried in vain for two years to oust Chey Tae-won, the refiner?s chairman, arguing that his conviction for a $1.2bn accounting fraud at affiliate SK Networks should disqualify him from managing the company.

But even in the absence of a ?white knight?, Mr Icahn would have to fight against the perception, that a foreign predator wants to take over a national icon.

South Koreans are fond of both cigarettes and ginseng and KT&G is identified with those two products. At 62 per cent, South Korea has the highest proportion of male smokers in the OECD.

The country opened its cigarette market to foreign brands in 1988, ending KT&G?s monopoly and allowing overseas companies to manufacture cigarettes in the country from 2001.

But KT&G?s premium brands such as Raison, Season and ESSE Light are still much more popular in the country than imported cigarettes.

However, KT&G is facing growing calls from investors to list its profitable subsidiary Korea Ginseng Corp, buy back and cancel more of its own shares, and increase dividend, as the cigarettes market matures with little growth.

The cigarette maker previously announced plans to buy back 24 per cent of its shares by 2008 and cancel 14 per cent. And the company offered its shareholders a Won1,600 cash dividend per share last year.

Some investors argue there are compelling financial reasons to spin off the ginseng business, whose fast growth has been obscured by the mature tobacco business. But cold financial logic might prove insufficient to overcome the emotions that could be sparked by Mr Icahn?s move on KT&G.

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