Korea Strategy:Reshuffling in Samsung’s structure

Event

Following SLI’s acquisition of a 37.5% stake in SCard from SEC and 2% blocksale of SDS stake, speculation is rife on further reshuffling in the group. Hereis a quick summary of the key issues (for details, please refer to KoreaStrategy – Chaebols: Untangling the spider web, 22 Sep 2014).

Impact

What happened Following Samsung SDS’s and Cheil Industries’ listing onthe KOSPI, Samsung C&T and Cheil Industries were merged in 2015. On 29Jan 2016, SLI acquired 37.5% stake in SCard from SEC. In addition, JY Lee,SEC’s vice chairman, decided to sell 2% stake in SDS to the market in orderto raise money to participate in the rights issue of Samsung Engineering.

What are key issues regarding the change in shareholding structureWe would advise investors to focus on the key issues, rather than trying toidentify beneficiaries/victims. First, the group should prepare for succession ofthe group’s leadership and, thus, inheritance tax should be on issue. Second,considering significant inheritance tax, the family may need to enforce itscontrol over the group via transformation into a holding company. Third, giventightening regulations on circular holdings, the group needs to disconnectcircular holdings eventually. Fourth, in view of adverse public opinions andregulations, the group needs to separate financial subsidiaries from nonfinancialsubsidiaries.

We believe the Samsung Group eventually needs to transform into aholding company structure, but this will take time: There are severalpossible scenarios being speculated on, but we believe many of them areunrealistic, considering the complexity of shareholding structure andregulatory constraints (mostly to do with Fair Trade Act and Financial HoldingCompanies Act). For example, Intermediary Financial Holding Company Actwill need to be approved by the National Assembly if a non-financial holdingcompany is to have financial subsidiaries. Hence, although we believe thetransformation to a holding company structure is inevitable, it’s going to be along journey, not a short trip.

We recommend investors stick to fundamentals: We do not think there aremeaningful arbitrage opportunities for minority shareholders. Any attempt totease out arbitrage could backfire if the mode of restructuring diverges fromthe aspiring arbitrageur’s expectation. Samsung Card (before SCard sold itsstake in Everland) and Samsung C&T (before it is merged with CheilIndustries) are cases in point. We believe Samsung Card (from the removal ofuncertainties over selling to 3rd party) and Samsung C&T (as a potentialholding company of the group) would be two outstanding beneficiaries fromrecent transactions.

Outlook

Given the complexity of shareholding structure and tightening regulations, webelieve there will be considerable changing of hands in Samsung Groupshares. However, we doubt there would be many arbitrage opportunities forminority shareholders, and hence recommend investors to stick tofundamentals of each Samsung affiliate.