IT conglomerate pays off for minority shareholders

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IT conglomerate pays off for minority shareholders

Speculation that Samsung Group’s founding family will revamp Korea’s biggest business empire to retain control has so far had an unlikely beneficiary: minority shareholders.

The conglomerate led by Lee Kun-hee, whose businesses account for more than 20 percent of Korea’s economy, may unlock “hidden value” as 72-year-old Lee transfers wealth to heirs, CLSA Asia-Pacific Markets says. Speculation the changes will come soon has lifted the market capitalization of Samsung’s 17 listed companies by more than $22 billion since May 7.

Samsung Group may shift ownership into at least three holding companies that allow the family to retain control while reducing the need to tie up capital in cross shareholdings that could otherwise be invested in profitable projects, CLSA says. Samsung Electronics Co., which has the lowest price-earnings ratio among the world’s 20 biggest companies, rallied 7.7 percent in the past eight days, while Samsung C&T Corp., which helped build the tallest building in Dubai, rose 16 percent.

“We would support a restructuring, which adds transparency,” Julian Mayo, who helps manage about $2.7 billion in emerging markets, including Samsung Electronics shares, as the co-chief investment officer at Charlemagne Capital Ltd. in London, said by e-mail on May 16. “The best investments are generally to be found where there is a long-term alignment of interest between the owners and managers of the company and its shareholders.”

Samsung Group’s ownership structure has come under the spotlight this month after Samsung SDS, which provides technology for the construction and manufacturing industries, unveiled plans for an initial public offering on May 8, a move seen by Morgan Stanley as a way for Lee’s family to fund a restructuring of the group.

After taking over Suwon-based Samsung Electronics in 1987, Lee built it into the world’s largest maker of smartphones, televisions and memory chips, becoming South Korea’s richest man in the process.

Samsung declined to comment on ownership structure, spokesman Kevin Cho said. The group, which generated about $325 billion in sales last year, hasn’t disclosed plans for restructuring or succession.

“It is inevitable for Samsung to turn more friendly toward investors,” Seo Jae-hyeong, chief executive officer at Daishin Asset Management, which oversees about $3.8 billion, said in an interview in Seoul. “Shareholder return policies are most likely to strengthen through the succession process.”

Under CLSA’s scenario, the group would create holding companies for its technology, financial and industrial units. Samsung Electronics would split into a holding company and an operating unit with better incentives to boost return on capital, according to Shaun Cochran, country head of Korea at CLSA.

Investor interest in the group’s restructuring options has also spurred Morgan Stanley and JPMorgan Chase & Co. to outline their own projections in reports during the past three weeks. Morgan Stanley analyst Sara Lee picked Samsung C&T and Samsung Life Insurance Co. as the key beneficiaries under her scenarios for a revamp of the group, while JPMorgan strategist Scott Seo said a restructuring may have “profound implications” for the entire South Korean stock market.

President Park Geun-hye’s government introduced last year legislation banning family-run chaebol businesses from creating new cross shareholdings. The strategy was blamed by the International Monetary Fund for contributing to the nation’s 1997-1999 financial crisis and used by families to control conglomerates while holding only minority stakes.

The opaque ownership structures have also helped to cap equity valuations in Korea, where the benchmark Kospi index trades at 10 times estimated earnings for the next 12 months, the lowest level among major Asian markets after China. Samsung Electronics’ multiple of 7.4 compares with 13 for Apple Inc., maker of the iPhone.

“Post restructuring, the family’s interest will become more aligned to minority shareholders, and the incentives to deploy capital in a far more efficient way will dramatically improve,” Cochran said in an interview in Seoul on May 19. CLSA has the equivalent of buy ratings on Samsung Electronics and Samsung C&T.


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