Samsung C&T defends its Cheil M&A proposal

A day after Elliott Associates initiated legal proceedings for an injunction to block the merger between Samsung Group’s construction arm and Cheil Industries, Samsung C&T hit back with a press release saying its M&A proposal is appropriate and offering data to back it up.

The company is suspected of deciding the terms of the acquisition when the estimated share value was at its lowest level because the company’s price-to-book (PBR) value ratio is currently below 1. The PBR is calculated by dividing the price of the stock by the latest quarter’s book value per share. A PBR below 1 means a company’s shares are undervalued and is it considered an M&A target, according to analysts.

“The reason the company’s PBR stayed under 1 was because of the slumping economy in the industry and the skeptical forecast for the future,” Samsung C&T said in a statement, adding that other major Korean construction companies also had a PBR of less than 1 in the first quarter. The PBR for GS E&C was 0.61, while Hyundai E&C was 0.81 and Daelim Industrial was 0.5, the company said.

“Considering such conditions in the industry, we thought carrying out the M&A as early as possible would benefit shareholders more as it could create synergy in the business,” said Samsung C&T.

The M&A of the two companies is considered part of the leadership succession from ailing Chairman Lee Kun-hee to his son Jay. Y Lee, Samsung Electronics vice chairman, but has been challenged by U.S. hedge fund Elliott Associates led by Paul Elliott Singer. Cheil Industries, the de facto holding company of Samsung Group, announced in May it would acquire Samsung C&T with each share of the construction company to be exchanged for 0.35 share of Cheil.

Elliott, the third-largest shareholder in Samsung C&T with a 7.12 percent stake, says the plan undervalues the construction company’s shares and only benefits Samsung Group owning family members.

“It looks like Samsung is trying to tighten the bond with friendly shareholders before the shareholders’ meeting scheduled in July,” said Kang Hyun-chul, a researcher at NH Investment and Securities.

Amid the keen battle between Elliott and Samsung, KCC Corporation, a construction material manufacturer, has increased its stake in Cheil Industries. KCC is considered friendly to Samsung.

KCC acquired a 0.2 percent stake of Cheil Industries on Friday for 23 billion won ($20.7 million), and multiple sources in the industry said the acquisition was made at the request of Samsung. KCC is the second-largest shareholder in Cheil Industries with a 10.18 percent stake.

KCC has maintained a friendly relationship with Samsung for years. In 2011, KCC acquired a 17 percent stake of Samsung Everland, which is now Cheil Industries, for 773.9 billion won. It owned 21.25 million shares of Cheil Industries when Samsung Everland merged with Cheil in 2013 and made 124.1 billion won by selling 7.5 million shares of Cheil when it was listed.

BY KWON SANG-SOO [kwon.sangsoo@joongang.co.kr]