Raids on Samsung Electronics and Welstory unit

The entrance to the headquarters of Samsung Electronics in Suwon, Gyeonggi, which was raided by prosecutors on Monday. [YONHAP]

Prosecutors raided the offices of Samsung Electronics and a Samsung food catering subsidiary on Monday as part of an ongoing probe into allegations of unfair business practices within the conglomerate, officials said.

Investigators from the Seoul Central District Prosecutors Office raided the headquarters of both Samsung Electronics in Suwon and Samsung Welstory in Bundang District, Seongnam, both south of Seoul in Gyeonggi, for documents on business deals to provide meal services for the electronics company’s employees.

The raids follow a massive fine of 234.9 billion won ($191.6 million) levied by the Fair Trade Commission (FTC) on five Samsung affiliates, including Samsung Electronics and Samsung Display last June for giving in-house cafeteria service contracts to the caterer and freezing out caterers not affiliated with Samsung.

The fines have since snowballed into a full-fledged probe after the antitrust regulator filed a criminal complaint with the state prosecution service against Samsung Electronics and its former executive Choi Gee-sung, asking for a formal investigation.

In a June report on the case, the FTC charged Samsung Electronics, Samsung Display, Samsung Electro-Mechanics and Samsung SDI with illegally directing business toward Samsung Welstory — a Samsung C&T subsidiary — paying higher-than-market prices. On effect of this was to inflate its value and the value of parent company Cheil Industries.

According to the FTC, the overvalued Samsung Welstory became a factor in the 2015 merger of Cheil Industries and Samsung C&T.

The overvaluation of Cheil relative to Samsung C&T when the two were merged gave shareholders of Cheil more shares of the surviving entity than they would have had otherwise.

Before the merger, Lee Jae-yong owned 23.2 percent of Cheil. After the transaction, he owned about 17 percent of the merged entity, which took the name of Samsung C&T. Shareholders in pre-merger Samsung C&T challenged the deal, saying their ownership was undervalued and that they lost out in the deal.

Lee now owns 18.13 percent after inheriting shares from his father.

Samsung C&T owns major stakes in a number of companies and forms a nexus of shareholder influence. It has 5.01 percent of Samsung Electronics and 19.34 percent of Samsung Life Insurance, which itself owns 8.51 percent of Samsung Electronics.

The FTC contended that the artificial overvaluation of Samsung Welstory allowed Lee to increase his ability to influence the direction of companies in which he and his family already have shares, especially Samsung Electronics

Lee owns 1.63 percent of Samsung Electronics, his mother has 2.30 percent and two sisters each hold under-1-percent stakes.

Without the revenue from the four other Samsung affiliates it provides catering services to, Samsung Welstory’s survivability is very much in question, according to the FTC.

While Samsung Welstory’s operating profits from the four related companies between 2013 and 2019 was 485.9 billion won, or 39.5 percent of its overall food-catering operating profit, the loss of those favorable deals would have led Welstory to suffer a total operating loss of 10.3 billion won in the same time frame, the antitrust regulator said.

BY MICHAEL LEE [lee.junhyuk@joongang.co.kr]