Elliott Associates, L.P., managed by billionaire Paul Elliott Singer, is continuing to intensify its effort to hinder the merger of two Samsung Group companies. The proposed $8-billion transaction is considered key in the generational transfer of power of the founding Lee family, however, Paul Singer and at least some of the shareholders of Samsung C&T, the company to be acquired, feel the deal undervalues the company and should not be approved. Furthermore, influential proxy advisers Glass Lewis & Co. and Institutional Shareholder Services Inc. (ISS) urged shareholders to reject the merger of Samsung C&T Corp. and Cheil Industries Inc. in separate announcements last Thursday and Friday respectively. Singer made his latest move to attempt to prevent the merger from happening yesterday, as he purchased a 1% stake in Samsung Fire & Marine Insurance Co. Ltd., confirmed by a spokeswoman of said company. The move gives Singer a little more voting power in the upcoming shareholder vote that will decide the fate of the merger deal.
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The merger of the two Samsung Group affiliate firms, which will go to a shareholder vote on July 17th, is the latest move by the Lee family to try and solidify their clan’s control, held through a complex cross-shareholding structure, over Korea’s largest family-ruled conglomerate or chaebol, which spans 67 companies. Lee Jae Yong, Samsung Group’s heir apparent and the son of now bedridden Chairman Lee Kun-hee, is the majority shareholder of Cheil Industries Inc., the de facto holding firm of the group. The expected change of leadership comes after the group’s chairman and the son of the group’s founder, Lee Byung-chul, suffered a major heart attack last year.
Elliott Associates has a 7.1% stake in Samsung C&T and a 1% stake in Samsung SDI Co. Ltd. which is an affiliate that also owns shares of Samsung C&T. Samsung Fire & Marine Insurance Co. Ltd. is also a shareholder of Samsung C&T. Samsung C&T, in turn, owns 4.1% of Samsung Electronics, the flagship affiliate of the group, which the Lee family owns less than 5% of. The merger between Samsung C&T and Cheil Industries will boost the Lee family’s stake in Samsung Electronics. Lee Kun-hee’s children are consolidating their family’s interests in the chaebol to smoothen the younger generation Lee family members’ transition into controlling the conglomerate.
So far, however, the road has not been buttery smooth. The American firm led by billionaire activist investor Singer is urging investors to spurn the deal to merge Samsung C&T and Cheil Industries as it says the all-stock deal – which will see Cheil Industries tendering 0.35 new shares for each Samsung C&T share – is disadvantageous to shareholders because it undervalues Samsung C&T shares while mostly just benefiting the Lee family.
Samsung says, nevertheless, that should the new resulting firm, to be called Samsung C&T, become a reality, synergies in their construction business will be brought about while Cheil Industries’ fashion and resorts business will be boosted by Samsung C&T’s global network. Samsung says that the resulting firm is expected to have annual revenue of about 60 trillion won in 2020 ($5.28 billion), 76% more than the separate firms’ combined revenues of 34 trillion won ($2.99 billion) last year.
Proxy adviser firms Glass Lewis and ISS are taking a stand with Elliott Associates, and appear to believe the spin by Samsung is nothing more than that: a spin. Glass Lewis, like Elliott Associates, says that the deal undervalues Samsung C&T shares. Rejecting the deal, which would mean that Samsung C&T and Cheil Industries do not get two-thirds of votes in the upcoming shareholder poll, could mean that Samsung C&T shares may plunge by up to 23%, Glass Lewis says, but this risk is better than locking in an undervaluation of the firm’s shares. Moreover, ISS says the deal significantly disadvantages Samsung C&T shareholders. ISS also says in its announcement of opposition to the deal that the synergies Samsung suggests the firm will have do not make up for the undervaluation of Samsung C&T shares. The deal hinges too much on Cheil Industries’ growth, the proxy advisory firm adds.
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