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Samsung puts transition process on fast-track

Samsung C&T shares fall, market remains divided over possible creation of holding unit

In a widely anticipated move, Samsung Electronics said Tuesday that it would review creating a holding company, increase cash returns to shareholders and have at least one outside director as part of efforts to enhance shareholders’ value.

The announcement comes nearly two months after a proposal by US activist hedge fund Elliott Management to reshape its corporate structure.

On Oct. 6, Elliott, through its affiliates -- Blake Capital and Potter Capital -- sent a letter to Samsung Electronics’ board members to split the tech giant into holding and operating companies, and list the operating unit on the Nasdaq stock exchange.

In a clear gesture to adopt most of Elliott’s demands for change, Samsung appeared to be initiating the structural transition of its crown jewel unit faster than expected, while seeking ways to keep the leadership of its owner family in the face of growing demand from foreign investors. More than 50 percent of Samsung Electronics shares are in the hands of investors overseas.

It was the first time that the nation’s largest company had officially announced the possible creation of a holding company.

(Yonhap)
(Yonhap)


“Samsung Electronics has taken steps to simplify its business to concentrate on core capabilities in the past several years and the company continues to review opportunities to optimize long-term value,” it said in a statement.

Samsung, however, said it would take about six months to complete the review.

“The review does not indicate the management or the board’s intention one way or another. The process is expected to require at least six months and Samsung Electronics will make a decision only after the review is complete.”

In a conference call, Samsung’s Chief Financial Officer Lee Sang-hoon said that for now the company has no plans to merge the holding company of Samsung Electronics and Samsung C&T, the de facto holding company of the group.

“At present, we will only consider the shift to a holding company structure,” Lee said.

Lee Myung-jin, head of Samsung’s investor relations team, said the company would make a decision on the Nasdaq listing of the operating unit after first concluding the matter on creating a holding unit.

“It’s questionable how much the listing on a US stock exchange would be effective in a situation where the Korean stock index is not included in the MSCI’s developed market index,” said Lee. “Uncertainty lingers in the long term.”

The tech giant also plans to increase total dividends by 30 percent on year, offering 4 trillion won ($3.42 billion) of cash returns to shareholders. Shareholders are expected to receive 28,500 won per share, a 36 percent increase from last year.

The announcement, however, drew mixed reactions from experts, investors and the market.

The restructuring scheme was not detailed enough, said Kim Chang-won, an analyst with IBK Investment and Securities, noting the share price of Samsung C&T fell 8.63 percent Tuesday. The share price of Samsung Electronics remained barely unchanged.

“Particularly its six month plan to review invited market disappointment, leading a decrease in the share price of Samsung C&T which has been widely expected to benefit (from the restructuring plan),” he said.

The extent of dividends falls short of expectation, considering Samsung’s massive hold of cash worth as much as 70 trillion won. Elliott urged the tech giant to pay a special dividend of 30 trillion won to “remedy” the company’s “excessive and inefficient capital structure.”

Samsung said Tuesday that it has concluded to maintain a net cash balance of 65 to 70 trillion won “based on its historical and expected capital expenditures, working capital requirements, M&As and other financing needs.”

Samsung’s six month review period also reflects the dilemma it faces in its succession scenario, said Chung Seon-sub, founder and CEO of Chaebul.com, a local corporate tracker.

“It would take considerable time for Samsung to take step two (a merger between Samsung C&T and a holding company of Samsung Electronics), as the share price of Samsung Electronics is still high and also the share ownership of the Lee family is still low,” said Chung.

“They might also have to give sometime for now, considering the current political situation the group is facing, such as the merger between Samsung C&T and Cheil Industries,” which is being investigated over alleged irregularities.

The transfer of equity ownership to Lee Jae-yong from his father has been problematic, as it would cost the heir tens of billions of dollars in inheritance tax.

About 18 percent of the shares are held by the Lee family and affiliates, including Lee Kun-hee’s 3.44 percent, Lee Jae-yong’s 0.58 percent and Samsung C&T’s 4.8 percent. An additional 1 percent stake will cost the heir to the throne about 2.6 trillion won.

In this regard, having a holding company after a split of Samsung Electronics, is a tempting option and one that costs less. This is the best way for Lee to avoid a huge tax burden.

By setting up a holding company carved out from Samsung Electronics, the junior Lee may seek to make use of the company’s 12.4 percent treasury stocks, said Park Joo-keun, co-founder of CEO Score, a chaebol analyst here. A merger between the holding company and Samsung C&T afterwards would give him relatively large stakes, he said.

“The announcement is what the market has been expecting but the timing of the announcement seems to be made earlier than expected, taking Elliott as an excuse,” he said.

When asked about the relationship between Samsung and Elliott, Park said the South Korean conglomerate appears to have decided to “sleep with the enemy.”

Elliott has not yet responded to the plan, according to its public relations representative in Seoul.

By Cho Chung-un (christory@heraldcorp.com)

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