Weekly Selected 'Celltrion 3-Company Merger'... Gaining Momentum (Comprehensive)

Visible Again After 3 Years
Selected as Lead Manager by Mirae Asset Securities
Recently Engaged in Aggressive Share Buybacks

Expectations for Merger of 3 Companies in Development, Production, and Distribution
Controversy Over Internal Transactions Likely to Disappear

Key Issue: How to Calm Small Shareholders' Opposition

The merger of the three Celltrion companies?Celltrion, Celltrion Healthcare, and Celltrion Pharm?is gaining momentum. It has been three years since the merger plan was disclosed in 2020. While it is expected to resolve management risks raised due to the group's unique internal division of labor, the key issue is how to overcome opposition from minority shareholders.

Incheon Songdo Celltrion Plant 2 Overview. / Incheon - Photo by Hyunmin Kim kimhyun81@

On the 13th, Celltrion stated in response to an inquiry disclosure, "We have currently completed the selection of the lead merger advisor and are reviewing the merger between the business companies." It is known that Mirae Asset Securities was selected as the lead advisor. Celltrion Healthcare and Celltrion Pharm also stated, "We are currently reviewing the merger between the business companies." However, all of them added that no final decisions have been made regarding the specific merger targets, timing, methods, or forms.

At the JP Morgan Healthcare Conference (JPMHC) in January 2020, Seo Jung-jin, Chairman of the Celltrion Group, announced, "If shareholders want, I will merge Celltrion, Celltrion Healthcare, and Celltrion Pharm as early as next year." Now, three and a half years later, the merger has begun to accelerate again. Although the pace seemed to slow after Chairman Seo stepped down from the front line of management in March 2021 and became Honorary Chairman, the merger resurfaced after his sudden return in March this year. At his comeback press conference, Chairman Seo said about the three-company merger, "Preparations are almost complete," and "The key is financial market stability." He also stated, "If the financial market stabilizes and it is deemed appropriate to proceed with the merger, I will present a milestone and complete the merger within four months."

The Celltrion Group's aggressive share buybacks this year also appear to be a prelude to the merger. Celltrion Healthcare announced the results of its treasury stock purchase worth 23.36356 billion KRW (380,000 shares) conducted from the 7th to the 11th. Similarly, Celltrion purchased treasury stock worth 50.27594 billion KRW (333,556 shares) during a similar period. Additionally, this year, Celltrion has conducted total purchases worth 200 billion KRW, and Celltrion Healthcare has conducted total purchases worth 75 billion KRW.

Notably, the recent treasury stock purchases were all made rapidly within a week. This is also interpreted as a move with the merger in mind. Since the acquisition or disposal of treasury stock is prohibited starting one month before the board resolution for the merger, this means that from mid-August at the earliest, the merger resolution can be carried out at any time.

The framework of the merger is expected to follow the roadmap disclosed in September 2020. The plan is to first establish Celltrion Healthcare Holdings, then establish a holding company system by merging with Celltrion Holdings by the end of 2021, and finally proceed with the three-company merger when the requirements of the Monopoly Regulation and Fair Trade Act regarding holding company activity restrictions are met. The merger of the two holdings was completed by the end of 2021 according to the disclosed roadmap, leaving only the merger among the three companies remaining.

As of the first quarter of this year, the Celltrion Group's governance structure is such that Chairman Seo holds 98.1% of Celltrion Holdings' shares, which in turn holds Celltrion (20%), Celltrion Healthcare (24%), and Celltrion Entertainment (100%). Chairman Seo also holds 11.2% of Celltrion Healthcare's shares. Celltrion holds 54.84% of Celltrion Pharm's shares, making it a subsidiary. Separately from Celltrion Holdings, Chairman Seo holds 69.12% of Celltrion Skincure's shares. Considering this shareholding structure, the three-company merger is expected to proceed in the order of Celltrion absorbing its subsidiary Celltrion Pharm, followed by the merger of Celltrion and Celltrion Healthcare.

Three-Company Merger: Will It Be a Quick Remedy to 'Risks'?

The reason the three-company merger is attracting attention is due to the Celltrion Group's unique division of labor structure. The three Celltrion companies have a division of labor where Celltrion develops and manufactures biopharmaceuticals, Celltrion Healthcare handles overseas distribution, and Celltrion Pharm manages domestic distribution. Additionally, Celltrion Pharm also produces synthetic pharmaceuticals (chemical drugs). Since production and distribution are separated and there is no direct equity relationship between Celltrion and Celltrion Healthcare, the sales performance of Celltrion supplying drugs to Celltrion Healthcare and Celltrion Healthcare selling drugs overseas are separately recorded as distinct revenues. This is why Celltrion discloses the fact of sales and supply contracts with Celltrion Healthcare.

Seo Jung-jin, Chairman of Celltrion Group [Photo by Celltrion]

The Celltrion Group has been embroiled in controversies over 'internal transactions' and 'accounting fraud.' When Celltrion transfers drugs to Celltrion Healthcare, the transaction is recorded as sales revenue for Celltrion. However, from Celltrion Healthcare's perspective, inventory assets that must be sold immediately arise at that moment. If they were the same company, it would be just a transfer from production to distribution departments, but since they are separate companies, the revenue is recorded separately, which is close to internal transactions. Additionally, there have been claims that the decline in the value of inventory assets was not reflected in the financial statements, inflating their value. Last year, the Financial Services Commission's Securities and Futures Commission judged that although accounting standard violations such as overstatement and failure to recognize impairment losses occurred in the Celltrion Group, there was no intentional wrongdoing, thus settling the matter for the time being. However, as the division of labor structure remains, the controversy continues.

If the merger is completed, such controversies will be resolved at once. With the launch of the 'integrated Celltrion,' the development and production of synthetic and biopharmaceuticals, as well as domestic and overseas sales, will all be conducted within a single company, establishing its stature as a global comprehensive pharmaceutical and bio company.

The key issue is the stance of minority shareholders. To approve the merger, it is basically necessary to secure at least one-third of the issued shares and two-thirds of the voting rights of attendees at the general meeting to pass a special resolution, and the right to request stock purchase may also be triggered. This is a right guaranteed by the Commercial Act for shareholders opposing the merger to request the Celltrion Group to buy their shares at a certain price. However, minority shareholders are reportedly largely opposed to the merger, judging that if the three companies' sales are consolidated, the group's total sales will decrease, reducing the potential for stock price appreciation. In this case, if the number of shareholders exercising the right to request stock purchase surges, there is concern that the funds required for the merger could become excessively large.

This content was produced with the assistance of AI translation services.