Hyundai Spends US$10 Billion On Land To Build New HQ

Cash-rich Hyundai Motor, the largest automaker in South Korea, outbid Samsung Electronics for a piece of prime real estate in Seoul. After becoming the new owner of the property with a record-breaking US$10 billion bid, triple the piece of real estate's assessed value, Hyundai’s shares took the biggest dive it has had in three years, tumbling by 9.2% last Thursday after the seller, state-run Korea Electric Power (KEPCO), made the announcement; meanwhile, KEPCO’s shares climbed 5.8%.

Analysts and investors were shocked upon hearing the inflated price that Hyundai had been willing to bid, having expected the Group, which cash assets and equivalents amounted to about US$40 billion at the end of the first quarter, to channel the money to higher dividends, research and development, and building more factories; the automaker's factories in China and Mexico are scheduled to begin production in 2016. Instead, Hyundai will build an automotive theme park, a hotel and new offices on the 79,000sqm commercial plot in the Gangnam district, which analysts expect will cost another US$6 billion to develop.

Some believe that the move is to fulfill a lifelong dream of Chung Mong-koo (son of Hyundai founder, Chung Ju-yung) who took over the company helm in 1999, and to whom the success of Hyundai Motors since is usually attributed. Now 76 years old, Chung might want to complete the legacy he leaves behind with an extraordinary Group headquarter that rivals those of foreign counterparts, like General Motors and Daimler; BMW’s and Volkswagen’s headquarters have even become tourist attractions.

Fulfilling this dream has aggravated many investors, though, especially foreigners who own 46% of the company’s shares, while local shareholders tend to be muted, according to Chae Yi-bai, an analyst at Solidarity for Economic Reform, because many fund houses manage funds on behalf of chaebol's (conglomerates), which dominate the South Korean economy, or the fund houses are themselves part of large corporate groups.

"Hyundai Motor needs to proactively reach out to shareholders to convince them on the rationale of the deal and provide adequate explanation," Chae said.

Chung Sun-sup of Chaebul.com, a research firm, offers one. According to him, Hyundai’s current headquarters, located in the outskirts of Seoul, does not befit the Group’s high standing; the piece of land that was auctioned is the only one left in the Gangnam district (made famous by the pop music video which is the antithesis of the upmarket area). 30 Hyundai Motor affiliates pay an estimated office rental of US$200 million. "If you flip that around, that's roughly equal to the amount of interest you'd get on 10 trillion won (US$10 billion) in bank deposits. So in some sense that is a rationale for such a high bid for the Kepco land," Chung said.

There has also been proposal for the government to tax excess corporate cash, requiring that conglomerates use at least 60% of their net profits on investment, salaries and dividends. If that rule comes into affect, Hyundai Motor Group’s companies would be slapped with a further tax of US$280 million.

The official statement given by the company spokesperson, though, is:

"In order to achieve production capacity of 10 million cars and bolster brand value that befits a global top-five company, we need a global business centre.” 

image: abcnews.com