Investors Aren’t Happy About the Samsung Merger

Sarang Ahuja’s latest post:Sarang Ahuja samsung

In late May, Samsung proposed an $8 billion merger of two company affiliates: Samsung C&T and Cheil Industries. The proposition is scheduled to go to a shareholder vote on July 17, but investors are heavily criticising the deal.

Shareholders are suspicious of transactions between affiliates, as these kinds of deals often benefit insiders at the expense their investors. Adding to concerns is the fact that these large South Korean companies are usually family-controlled. In fact, the founding family of Samsung currently owns 42% of Cheil Industries, leading many believe that this merger might be motivated by family interests.

Last year Lee Kun-hee, the chairman of Samsung and head of the family, had a heart attack. Since then, his children have been working to consolidate company holdings, and the acquisition of C&T could be a way for the family to prepare for Kun-hee’s passing, which will come with approximately $5 billion in inheritance tax. C&T owns a 4.1 percent stake in Samsung Electronics and a 17 percent stake in Samsung SDS.

One of the most active critics of this deal has been Elliott Management, a $26 billion investment firm that owns a 7 percent stake in Samsung C&T. They filed an initial lawsuit in South Korea asking the Seoul central district court to put a stop to the transaction. Unfortunately for them, a judge declined the request. In a second suit, Elliott Management asked the court to block the sale of the 5.76 percent C&T stake to KCC, since KCC is a company that holds a stake in Cheil Industries. Samsung argues that the terms of the deal comply with South Korean law, that the merger is necessary for the success of C&T, and that investors like Elliott Management are just interested in short-term gains.

Another critic is Hugh Young, managing director in Asia for Aberdeen Asset Management, a $491 billion financial firm. His main concern is the merger ratio, which he doesn’t feel recognizes the full value of the company. C&T was trading at depressed levels before the proposed merger due to slow revenue in the first quarter of 2015. The day before the deal was announced, C&T’s share price was 40 percent below its aggregate net asset value while Cheil Industries’ stock was trading at 131 times estimated earnings. This means that C&T stockholders will receive 0.35 Cheil shares for each of their shares should the deal go through.

One key player that has not spoken up about the transaction is NPS, the South Korean pension system that owns a 10 percent stake in C&T. They will likely end up determining the results of the vote.

The reaction to this transaction highlights a common feeling among investors: if South Korean companies don’t become more pro-investor in their practices, their stocks will continue to trade at a lower rate than rivals in other developed countries. While investors are doing all they can to put a stop to these kinds of actions, it’s not looking like true reform is coming anytime soon.

from Sarang Ahuja


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