A Billion-Dollar Korea Divorce Works When Shaming Fails

South Korea has been trying to rein in the powerful family-run conglomerates for at least a decade, with little success. But a billion-dollar divorce bill might just tip the scale. It turns one of the nation’s largest conglomerates into a possible hostile takeover target.

In a surprise ruling, the Seoul High Court told Chey Tae-won, chairman of SK Group, which churns out products from memory chips to electric vehicle batteries, to pay 1.38 trillion won ($1 billion) by dividing common property and another 2 billion won in alimony to his ex-wife Roh Soh-yeong, the daughter of former South Korean President Roh Tae-woo. The court said Chey’s shares in holding company SK Inc. should be considered as part of the couple’s joint property, overturning a 2022 ruling for a much smaller settlement. Chey plans to appeal.

This ruling is setting a new standard in Korea, in that it recognized the importance of spousal contribution to a company’s success, according to Smartkarma analyst Sanghyun Park. While SK was founded in 1953 by Chey’s father as a textile company, the business only took off after the pair got married in 1988, the year Roh’s father was inaugurated. As part of the government’s privatization drive, the group became the largest shareholder of state-owned Korea Mobile Telecommunications Corp., which eventually became SK Telecom Co. With nearly half of the market share, it is now Korea’s largest mobile operator. As such, Roh’s political connections may have bolstered SK’s success.

But more importantly, this split shows that Korea’s wealthiest families don’t always operate as a united wolf pack, and that the ownership of some of the country’s most valuable assets can be in play.

Chey’s hold over SK could become tenuous. The chairman and his kin, including his sister Choi Ki-won, own only about 25% of the group’s holding company. If Chey has to transfer or sell some of his shares to settle the divorce bill, the family’s stake might fall below 20%, a golden threshold of control in Korea.

The threat of a hostile takeover or nasty hedge fund activism campaign is real. New York-based Elliott Management, for one, has a long track record there. SK’s valuation is still depressed. Even after the strong rally propelled by the ruling, it’s trading at more than a 20% discount to the average fair value assigned by analysts.

This type of conglomerate discount is why the benchmark Kospi index is so unloved. Known as the “Korea Discount,” the Kospi is now trading at below the book value versus the Nikkei 225’s two times and MSCI China’s 1.3 times. The billionaire families are happy to keep share prices of their holdings cheap, because they don’t want to pay Korea’s inheritance tax, the second-highest among members of the Organization for Economic Co-operation and Development, or OECD. On top of that, they have taken public a labyrinth of holding companies to mask their true wealth, diluting the whole stock market along the way.

Case in point: Chey controls SK Hynix Inc., a semiconductor giant with a $100 billion market cap, but his estimated net worth is just $2.4 billion. Chey has a 17% direct stake in SK Inc., which in turn owns 30% of SK Square Co., the largest shareholder of Hynix.

In recent months, President Yoon Suk Yeol’s administration has been touting a corporate governance reform plan to Wall Street, hoping to emulate Japan’s success. One approach is to name and shame firms that do not attempt to make money for shareholders. The Korea Value-Up Index, to be introduced in the third quarter, takes a page out of Tokyo’s “shame index.” Japanese companies that didn’t make the cut were named in the local media.

But shaming chaebol, as Korean conglomerates are known, has no teeth. Unlike in Japan, their wayward ways are well-known. Lee Jae-yong, the de facto leader of the Samsung family, was elevated to become the chairman of Samsung Electronics Co. after serving jail time for bribing a former South Korean president.

Another approach is to align the billionaire families’ interest with the stock market’s performance. One proposal is to cut the inheritance tax, levied at as much as 50%. It’s unclear, however, if a landmark tax reform will carry any momentum, after Yoon suffered a major defeat in parliamentary election in April.

This perhaps makes the SK divorce case all the more interesting. Instead of waiting endlessly for politicians to act, investors can reliably expect that chaebol families are changing from within, and that the patriarchs are not as dominant as they once were. Roh, for instance, is known to be strong, opinionated, and used to getting what she wants. Just like elsewhere in the developed world, chaebol are confronted with succession and change of control issues. When takeover offers are on the table, the families will have to appeal to and appease minority shareholders.

“Now, I think it's right to let my husband go find the happiness he wants so desperately,” Roh wrote after Chey filed for a divorce. (He had started a second family with a glamorous social influencer.) But the strong-headed Korean princess wants half of his money. It appears the stubborn K-discount can only be resolved with K-drama.

More From Bloomberg Opinion:

• No, South Korea Is Not Ready for MSCI’s Elite Club: Shuli Ren
• Why China Wants South Korea to Stay Open: Tim Culpan
• A Surprise South Korean Boom Is Going Unnoticed: Daniel Moss

Want more Bloomberg Opinion? OPIN <GO>. Or you can subscribe to our daily newsletter.