Samsung Heavy Industries, the shipbuilding unit of Samsung Group, said Wednesday that it has scrapped a deal for merging with affiliated plant builder Samsung Engineering due to higher-than-expected share buyback costs.

“We have decided to respect the opinion from the market and shareholders,“ Samsung Heavy said in a statement. “The company will reconsider a possible merger with Samsung Engineering, keeping tabs on the market situation and shareholders’ opinions.”

The deal, said to be a part of plans for transferring managerial authority to ailing Samsung chairman Lee Kun-hee’s only son Jay-yong, collapsed because at 1.63 trillion won ($1.5 billion), the cost of buying back Samsung Engineering shares exceeded the limit set by the two firms’ institutional and individual shareholders, who ended up vetoing the deal.

Samsung Engineering shareholders wanted the firm to buy back shares worth 706.3 billion won, while Samsung Heavy shareholders sought a 923.5 billion won buyback, according to a regulatory filing.

Industry watchers said that the two Samsung units have failed to convince the shareholders who could not see any chances of reaping short-term benefits from the deal, especially since Samsung Engineering’s expertise in onshore plants is unlikely to be quickly transferred to offshore facilities.

On Sept. 1, the two companies announced plans for a merger, calling it a win-win strategy.

Market watchers were keen to analyze the impact of shareholders’ reaction to Samsung Group’s push for the merger, which many believe is linked to the succession process.

“Today’s move should sound an alarm on Samsung’s restructuring, which has been carried out unilaterally,” said Chung Sun-sup, CEO of research firm Chaebul.com.

“It signals that shareholders could put brakes on restructuring moves if they go against their interests.”

Since May when the senior Lee was hospitalized after a heart attack, Samsung Group has been rushing to reorganize its businesses in a bid to strengthen the grip of the younger generation, who are Samsung Electronics vice chairman Lee Jay-yong and his two younger sisters.

The cancellation of the merger between Samsung Heavy and Samsung Engineering is expected to complicate Samsung’s power transfer plan.

By Seo Jee-yeon and news reports
(jyseo@heraldcorp.com)