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More Transparency on LG

Third Avenue International Value's Amit Wadhwaney says LG's holding company structure is much less opaque than it used to be.

Mentioned:

Mike Breen: I see a lot of folks walking around with LG phones here at the conference, and I know you own that name, and that's a Korean company--a holding structure that is a little bit opaque.

Amit Wadhwaney: No, not really, no. LG in the old days was much more opaque. In fact, it used to by Lucky Goldstar. LG split up into the LG part and the GS group. LG of course wound up with the LG Electronics, LG Chemicals, LG Health Sciences and a number of other companies.

The Korean government, years ago, going back to the late 1990s, early 2000s, probably would have done nothing in the Korean holding company area, partly because you had these octopus-like structures where companies held each other as well as your cross-debt guarantees. So, effectively when you took on a company you took on systemic risk. If one part of the company would fail there would be repercussions all the way through the entire corporate structure. The government has forced a change in that.

Typically what you have now is a holding company with lower-tiered companies. It's infinitely more transparent, cross guarantees are no longer easily permitted--there are tax disincentives to do that sort of stuff. So, LG itself is a collection of pretty well-capitalized companies. And the company at the top, the pure holding company is actually very well capitalized. One thing, which is kind of neat, each of the LG company operating subsidiaries pays the parent company a fee for using the LG name. The fee alone is enough to pay all of the operating expenses, debt services, any other costs that occur at the holding company level.

Breen: So the rest is kind of gravy then?

Wadhwaney: Yes, yes.

Michael Breen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.