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Samsung revamps governance

Separation of financial and industrial arms still faces company
Apr 12,2018
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Samsung SDI sold off all of its holdings in its construction affiliate Samsung C&T on Wednesday in an effort to untangle the conglomerate’s knotty cross-shareholding ties.

The move comes just two weeks after Hyundai Motor Group pulled off its own corporate governance restructuring, and well before the August deadline for the sale set by the Fair Trade Commission.

Samsung SDI sold 4.04 million shares worth 559.9 billion won ($526.3 million) in a block deal before the stock market opened. The per-share price is 138,500 won after a 3.8 percent discount, lower than the closing price Wednesday of 187,000 won. No members of Samsung’s founding family, including Vice Chairman Lee Jae-yong, were involved in the sale.

The energy and display arm of Samsung explained it would use the capital gained from the sale for future investments.

More importantly, the deal could cut three out of the seven circular shareholding rings centered around Samsung C&T - a headache that has been dogging Samsung, as government pressure has stepped up recently.

Cross-shareholding is a common among family-run Korean chaebol, and is considered a tactic for family members to maintain control over their vast empires despite owning petty stakes in the companies.

“It is notable that Samsung executed the corporate overhaul when it still has more than four months before the government-designated deadline, and that no owner family members participated in the deal,” said Kim Dong-yang, an analyst with NH Investment and Securities. “Samsung seems to be taking a pre-emptive action, facing demand from both the market and the government.”

In February, the FTC ordered Samsung SDI to sell its holdings in Samsung C&T by Aug. 26 after revising its interpretation of antitrust regulations on the merger of Samsung C&T and Cheil Industries in 2015. The government said the merger strengthened Samsung’s cross-shareholding ties.

Samsung C&T is a de facto holding company for the group. To break off the remaining four rings and eventually be set free from the problem, Samsung only needs Samsung Electro-Mechanics to sell its 2.61 percent stake in Samsung C&T and Samsung Fire and Marine Insurance to sell its 1.37 percent stake in Samsung C&T.

“We have decided on the principle of resolving the rest of the circular-shareholding rings,” said a Samsung executive. “But when and how has yet to be confirmed.”

Vice Chairman Lee’s control of the country’s most valuable conglomerate likely won’t be endangered, as the combined stake that his family members own is over 30 percent of Samsung C&T’s value.

But Samsung still has a lingering problem.

It needs to divorce its financial arms from industrial businesses under to comply with new government regulations on financial companies’ holdings.

Samsung will be scrutinized when the government lays out new rules that will define financial groups by their assets. It will monitor Samsung affiliates for violations on the grounds that the group has financial arms such as Samsung Life Insurance, Samsung Fire and Marine Insurance and Samsung Securities.

FTC Chairman Kim Sang-jo said in a radio show on Tuesday that the biggest issue with Samsung’s corporate governance is that the capital from its insurance arms is used to govern Samsung Electronics.

“It’s an issue that is very hard to tackle,” he said.

Samsung Life Insurance owns 8.19 percent of Samsung Electronics and Samsung Fire and Marine Insurance has a 1.43 percent stake. Combined, the shares are worth around 30 trillion won, and other affiliates will have to get involved to engineer a deal to separate the financial companies from the electronics behemoth.

One of the most plausible scenarios is Samsung C&T buying the stake in Samsung Electronics from Samsung Life Insurance. Given that the construction arm owns a 43.4 percent stake in Samsung BioLogics, it may sell the shares to Samsung Electronics and use the capital to buy the Samsung Electronics shares from Samsung Life Insurance, according to Lee Sang-heon, an analyst with Hi Investment and Securities.

“If Samsung C&T acquires a bigger stake in Samsung Electronics, the crown jewel, its role as a holding company will be boosted,” he said.


BY SEO JI-EUN [seo.jieun@joongang.co.kr]