PharmaResearch Spin-Off: A Textbook Case Study of Destroying Shareholder Value

• Last week, PharmaResearch announced that it has approved a corporate spin-off, to separate the existing company into two distinct entities including PharmaResearch Holdings (surviving entity) and PharmaResearch (newly created entity).

• PharmaResearch spin-off is a textbook case study of destroying shareholder value. Minority shareholders should oppose this deal.

• The spin-off ratio is based on a pure net asset basis, not taking into consideration the future earnings and cash flow streams of the company's most important product line Rejuran.

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PharmaResearch Spin-Off: Textbook Case Study of Destroying Shareholder Value

The PharmaResearch (214450 KS) spin-off is a textbook case of destroying shareholder value. Its share price has already lost nearly 20% of its value since its announcement. Minority shareholders should oppose this deal since this deal is not in their best interests. Rather, the major purpose of this spin-off is to mainly benefit Chairman Jung and his family members.

Why?

The following are the three major reasons why this deal is terrible for the minority shareholders:

1) First, the spin-off ratio is based on a pure net asset basis, not taking into consideration the future earnings and cash flow streams of the company's most important product line - Rejuran.

The spin-off ratio is 0.7427944 for PharmaResearch Holdings and 0.2572056 for the new PharmaResearch. This spin-off ratio is not fair and makes little sense since PharmaResearch should be valued higher than PharmaResearch Holdings.

2) Second, one of the clauses of the spin-off states that the surviving company after the division will conduct a paid-in capital increase in-kind through a tender offer for the shares of the newly established company after the completion of this division procedure and relisting at a certain point in time.

In other words, Chairman Jung will try to raise his stake in PharmaResearch Holdings much higher than his current 30.48% stake in the company. In this spin-off process, there is a relatively high probability that the minority shareholders may try shift their capital allocation to PharmaResearch (since this is the opco and has the valuable Rejuran brand) which could result in Chairman Jung increasing his stake in PharmaResearch Holdings at much cheaper prices.

3) Third, it now seems clear that the most important reason why the company may be trying to complete this spin-off is to accelerate the eventual transfer of ownership from the Chairman Jung (who is 68 years old) to his children. It also appears that Chairman Jung wanted to accelerate this process prior to the new Lee Jae-Myung administration which is ready to pass the Commercial Act that could make it difficult for these kinds of spin-offs to be completed.

Impact on Share Price

We have a Negative View of PharmaResearch (214450 KS).Although the company's share price has declined nearly 20% since the announcement of the spin-off, we believe its share price could face continued weakness in the weeks ahead.

In fact, we believe there is a growing potential for its share price to decline additional 10%-20%+ in the next several weeks. In addition, if there is enough support among minority shareholders, this spin-off proposal may eventually get blocked which may then have a positive impact on its share price.