Hedge fund challenges Samsung

Elliott Management Corp., a U.S. hedge fund, called on Samsung Electronics Wednesday to split into a listed holding company and a listed operating company and to give out dividends of 30 trillion won ($2.7 billion) to shareholders.

In an open letter to Samsung Electronics’ board, Black Capital and Potter Capital, both affiliates of Elliott, said the proposals are meant to address issues that “depressed shareholder value at Samsung Electronics over time” such as an “unnecessarily complex” corporate governance structure.

The letter further proposes that Samsung Electronics’ new holding company, which would serve as the Lee family’s main ownership vehicle, acquire shares in the new operating company through a tender offer; the holding company merge with affiliate Samsung C&T; a listing of the operating company on the Nasdaq; paying out of 75 percent of the operating company’s cash flow as dividends; and the addition of at least three “truly independent” directors to the boards of both holding and operating companies.

“Simply put, the remarkable achievements of Samsung Electronics are not being properly reflected in the market’s valuation of its shares, and that problem needs to be addressed,” the letter said. The proposals “will deliver better capital returns, better corporate governance, and enhanced shareholder value.”

While lauding Samsung’s recent share buyback worth 11.3 trillion won, Elliott said it believes the measure has not been sufficient to remedy the company’s “excessive and inefficient capital structure.” The U.S. investor cited Samsung’s cash balance, which amounted to as much as 77 trillion won as of June 30, as well as its remaining treasury shareholding. Elliott cited the examples of Qualcomm, TSMC and Apple to explain Samsung Electronics’ sub-optimal track record when it comes to capital returns, describing them as “falling well short of some of its global peers.”

The proposals from the fund, run by billionaire Paul E. Singer, came three weeks before Samsung is scheduled to hold an extraordinary shareholders meeting on Oct. 27, at which the appointment of Vice Chairman and de facto CEO Lee Jae-yong as a board member is expected to be confirmed. Lee will assume legal responsibility for all management-related decisions. Samsung, Korea’s biggest and most valuable conglomerate, is bracing for a major leadership transition as Lee takes over from his father Lee Kun-hee, who has been hospitalized since May 2014 following a heart attack. Speculators have come up with various methods that Samsung may choose to help the son solidify his control over the group.

Elliott’s proposal for a de-merger is one such method.

“We will carefully review the shareholder’s proposals,” a Samsung spokesman said regarding the letter, adding that Elliott is one of its minority shareholders with a mere 0.62 percent stake.

That is still more than the 0.59 percent that Vice Chairman Lee owns.

Shares of Samsung Electronics spiked 4.45 percent to close at 1,691,000 won on Thursday. They hit a record-high price of 1.7 million briefly during the session.

“Elliott’s proposals have wiped out concerns over the Galaxy Note7 scandal now that all the attention has diverged to Samsung’s governance structure,” said Greg Roh, head of research at HMC Investment & Securities, “which will positively influence the stock prices at least until the Oct. 27 shareholders’ meeting.”

But he noted Samsung’s policy on enhancing shareholder value doesn’t mean its earnings will improve, especially after the company was hit with a massive recall of dangerous phablets and a saturation in the smartphone market.

Samsung Electronics is scheduled to release guidance for its third-quarter earnings today.

According to an analyst consensus from stock information provider FnGuide, Samsung is estimated to have posted 50.9 trillion won in revenue, down 1.45 percent from a year ago, and 7.56 trillion won in operating profits, up 2.35 percent year on year, during the July-September period. The operation profit projection hovered above 8 trillion won a month earlier, but the situation deteriorated after faulty Galaxy Note7 smartphones led Samsung to recall 2.5 million units sold or preordered. Analysts say the recall resulted in over 1 trillion won in operating losses.

Elliott has a record of fighting Samsung. Last year, it made a failed attempt to derail a merger between two affiliates, Samsung C&T and Cheil Industries, claiming the deal would undermine the interests of minority shareholders. The merger was meant to transfer more power to Vice Chairman Lee.

BY SEO JI-EUN [seo.jieun@joongang.co.kr]