Samsung C&T purchase fuels merger-acquisition speculation

Rumors that the two construction arms of Samsung Group may merge have surfaced again after Samsung Construction & Trading acquired a share of Samsung Engineering.

Samsung C&T, the nation’s second-largest builder, announced last Friday that it bought 245,481 shares for a 0.6 percent stake in Samsung Engineering that is valued around 19 billion won ($17 million). Samsung C&T said the move was just an investment, but securities firms speculate that it could be the start of the merger and acquisition process.

The price of Samsung C&T shares has lost nearly 5 percent since the announcement. Analysts said investors are concerned about Samsung C&T injecting a large sum of money to acquire Samsung Engineering, which has performed poorly this year. The company posted a net loss of 92.8 billion won in the second quarter on the heels of a shocking 218.9 billion won net loss in the first quarter.

Analysts have been releasing reports that foresee a possible merger between the two Samsung subsidiaries as their businesses overlap in the area of power plant construction. Samsung C&T was originally focused on building construction and civil engineering, but since former Samsung Engineering CEO Jung Yeon-joo was appointed as its new leader in 2010, the company also has been expanding to get orders for factory construction.

Korea Investment & Securities this week released a report that analyzed three possible scenarios for Samsung C&T merging with Samsung Engineering: Samsung C&T buying Samsung Engineering shares from current major owners such as Samsung SDI and Cheil Industries; Samsung C&T acquiring new shares of Samsung Engineering after it conducts a capital increase through third-party allocation; and consolidation to form a new enterprise.

The securities firm noted the first two scenarios would require a large amount of cash. According to the report, Samsung C&T would need about 630 billion won to buy a 20 percent stake from existing shareholders. In addition, even if Samsung C&T injected the money and acquired Samsung Engineering, newly purchased stocks would be transformed to treasury stocks that don’t have voting rights.

“Unless Samsung C&T made Samsung Engineering its subsidiary, purchasing stakes and entering a capital increase doesn’t seem likely,” said Lee Hoon, a researcher at Korea Investment & Securities. “Consolidation seems to be much more realistic, as it could bring synergy and doesn’t require big cash outlays.”

However, Lee suggested that a merger of the two companies still would not be a walk in the park because it would require approval from general stockholders who could ask for appraisal rights if the price of their shares drop after the announcement of a merger.

“[If the merger happens], it would reduce inefficiency in input of resources and bring many other benefits,” said Lee Kwang-soo, a researcher at HMC Investment Securities.

BY JOO KYUNG-DON and YOON CHANG-HEE [kjoo@joongang.co.kr]