Holding Companies Update on Samsung Group’s ownership restructuring and investment strategy
Cheil Industries to merge with Samsung C&T On May 26 th , Cheil Industries and Samsung C&T announced that their boards of directors approved a proposed merger between the two companies. Under the agreement, Cheil Overweight (Maintain) Industries will acquire Samsung C&T by offering 0.3500885 new shares for each Samsung C&T share. The merged entity will be named Sa msung C&T. From a governance Sector Update perspective, we believe the merger will allow Samsung Group’s controlling family to 1) simplify the group ’s circular shareholding structure, 2) gain control over Samsung C&T, May 27, 2015 and 3) secure Cheil Industries’ stake in Samsung Ele ctronics (SEC). The deal could be called off if the cost of buying back dissenting shares collectively exceeds W1.5tr. However, we do not expect this to happen, given the projected share price movements Daewoo Securities Co.,CCCo., Ltd. of both companies.
[Holding Companies/IT Services] Group ownership restructuring outlook and investment opportunities
Dae-ro Jeong We expect additional group restructuring events to unfold. In particular: +822-768-4160 [email protected] (1) Affiliates are expected to sell their stakes in the merged entity to unwind group circular shareholdings. Currently, there are around 10 cross-shareholdings among
Yoon-seok Seo affiliates of Samsung Group, all of which come back to either Cheil Industries or +822-768-4127 Samsung C&T . Once the merger is finalized, we believe group affiliates will successively [email protected] liquidate their holdings in the combined entity, thereby unwi nding the group’s circular shareholding structure.
[Investment opportunity] Samsung SDI and Samsung Electro-Mechanics (SEMCO) may sell their stakes in the merged entity, eliminating the group’s circular shareholdings and generating cash flow.
(2) SEC is likely to convert to a holding company structure. Given the government’s ban on new cross-shareholdings and the group’s budget constraints, the only viable way for the group to raise its SEC stake would be to turn the electronics giant into a holding compan y. In this case, the group could secure stable ownership in the holding company and the electronics operating subsidiary via holdings in Samsung SDS, SEC’s share buybacks, and tender offers.
[Investment opportunity] Watch for additional buybacks and SEC spin-off ; Value of Samsung SDS shares could be boosted.
(3) Samsung Group’s holding company conversion looks highly likely. O nce the intermediate financial holding company bill pending in the National Assembly becomes law, the group will be able to establish Samsung Life as an intermediate financial holding company. Then, the group could ultimately ensure stable ownership in electronics and financial affiliates via the new entity resulting from the merger of Cheil Indu stries and Samsung C&T. All in all , we think Samsung Group is highly likely to opt for a holding company structure, given the need to regroup affiliates. [Investment opportunity] Watch for spin-off of Samsung Life and spin-off of post- merger Samsung C&T.
Five key considerations for ownership restructuring
Source: KDB Daewoo Securities Research
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
May 27, 2015 Holding Companies
Figure 111.1. CCCorporateCorporate governance of Samsung Group (before merger)
Source: KDB Daewoo Securities Research
Figure 222.2. Corporate governance of Samsung Group (after merger)merger)
Source: KDB Daewoo Securities Research
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May 27, 2015 Holding Companies
Cheil Industries to merge with Samsung C&T
On May 26 th , Cheil Industries and Samsung C&T announced that their boards of directors approved a proposed merger between the two companies. Under the agreement, Cheil Industries will acquire Samsung C&T by offering 0.3500885 new shares for each Samsung C&T share. The merged entity will be named Samsung C&T.
Table 111.1. Exchange ratio forforfor Cheil Industries and Samsung C&T merger (W) Common stock Cheil Industries Samsung C&T Base price 159,294 55,767 Exchange rratioatioatioatio 111 0.3500885 Preferred stock Cheil Industries Samsung C&T Base price 99,432 34,810 Exchange rratioatio 111 0.3500885 Notes: Base price is the weighted average of the past month’s average price, past week’s average price, and the price on the most recent date Source: KDB Daewoo Securities Research
TableTableTable 222.2. Appraisal right exercise price (W, %) Appraisal right exercise price (A) Current price (B) Disparity (B/A)
Cheil Industries 156,493 188,000 20.1% common stock Samsung C&T 57,234 63,500 10.9% common stock Samsung C&T 34,886 40,050 14.8% preferred stock Notes: Appraisal right exercise price is the weighted average of the past two months’ average price, past week’s average price, and the price on the most recent date Source: KDB Daewoo Securities Research
Figure 333.3. Exchange ratio of Cheil IndustriesIndustries----SSSSamsungamsung C&T merger
(x) 0.50 Cheil Industries-Samsung C&T exchange ratio
0.45 Exchange ratio = 1:0.3500885
0.40
0.35
0.30 2/23 3/23 4/23 5/23
Source: KDB Daewoo Securities Research
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Figure 444.4. Current price, acquisition price, and appraisal rigrightht Figure 555.5. Current price, acquisition price, and appraisal rigrightht exercise price of Cheil industries exercise price of Samsung C&T
(W) (W) Base price 5/26: Announced merger 5/26: Announced merger 200,000 Base price 65,000 Appraisal right exercise price Appraisal right exercise price Current share price
180,000 60,000
160,000
55,000 140,000
5/22: Merger base date 5/22: Merger base date
120,000 50,000 2/26 3/26 4/26 5/26 2/26 3/26 4/26 5/26
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
We see this deal as essential to the governance restructuring of Samsung Group. Indeed, the merger will allow Samsung Group’s controlling family to 1) simplify the group’s circular shareholding structure, 2) gain control over Samsung C&T, and 3) secure Cheil Industries’ stake in SEC.
The deal could be called off if the cost of buying back dissenting shares collectively exceeds W1.5tr. However, we do not expect this to happen, given the projected share price movements of both companies.
TableTableTable 333.3. Changes tototo holdings ooff controlling family & related parties (shares) Cheil IndustriesIndustries++++ Cheil Industries Samsung C&T Samsung C&T NotesNotesNotes Shares Ownership Shares Ownership Shares Ownership Lee Jae-yong 31,369,500 23.24% 0 0.00% 31,369,500 16.54% Lee Bu-jin 10,456,450 7.75% 0 0.00% 10,456,450 5.51% Lee Seo-hyun 10,456,450 7.75% 0 0.00% 10,456,450 5.51% Related parties: Lee Gun-hee 4,653,400 3.45% 2,206,110 1.41% 5,425,734 2.86% 30.79% Lee Yu-jeong 600,000 0.44% 0 0.00% 600,000 0.32% Cho Woon-hae 100,000 0.07% 0 0.00% 100,000 0.05% SEMCO 5,000,000 3.70% 0 0.00% 5,000,000 2.64% Samsung SDI 5,000,000 3.70% 11,547,819 7.39% 9,042,759 4.77% Samsung F&M 0 0.00% 7,476,102 4.79% 2,617,297 1.38% Samsung Life 0 0.00% 678,754 0.43% 237,624 0.13% Affiliates: Samsung 9.55% Foundation of 1,101,000 0.82% 123,072 0.08% 1,144,086 0.60% Culture Samsung 0 0.00% 231,217 0.15% 80,946 0.04% Foundation KCC 13,750,000 10.19% 0 0.00% 13,750,000 7.25% Employee stock ownership 5,749,990 4.26% 0 0.00% 5,749,990 3.03% association Cheil Industries 19,033,800 14.10% 0 0.00% 19,033,800 10.03% Treasury stock: Samsung C&T 1,849,850 1.37% 8,990,557 5.76% 4,997,341 2.63% 12.67% Total number 135,000,000 100.00% 156,217,764 100.00% 189,690,045 100.00% of issued shares Source: KDB Daewoo Securities Research
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TableTableTable 444.4. Merger schedule Cheil Industries Samsung C&T (((s(sssurvivingurviving entityentityentity)entity ))) BOD resolutions May 26 ththth May 26 ththth Merger contract date May 26 th May 26 th Announcement of closing date of shareholders list May 27 th May 27 th Confirmation of shareholders list Jun. 11 st Jun. 11 st Start Jun. 12 th Jun. 12 th Closing period of shareholders list End Jun. 16 th Jun. 16 th Notification of shareholders ’ meeting Jul. 2nd Jul. 2nd Start Jul. 2nd Jul. 2nd Reporting objection to merger End Jul. 16 th Jul. 16 th General meeting for merger approval JulJulJul. Jul ... 171717 ththth JulJulJul. Jul ... 171717 ththth th th Exercising of appraisal rights by Start Jul. 17 Jul. 17 dissenting shareholders End Aug. 6th Aug. 6th Merger date SepSepSep.Sep ... 111ststst SepSepSep. Sep ... 111ststst Registration of merger SepSepSep.Sep ... 444ththth SepSepSep. Sep ... 444ththth Distribution of stock certificates SepSepSep. Sep ... 141414 ththth - Listing of new shares SepSepSep.Sep ... 151515 ththth - Source: DART, KDB Daewoo Securities Research
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Samsung Group’s ownership restructuring
1. Affiliates to sell stake in merged entity to unwind group circular shareholdings Going forward, we expect Samsung Group to gradually unwind its circular shareholdings. Although the revised Monopoly Regulation and Fair Trade Act (which went into effect in 2013) does not ban existing circular shareholdings, Samsung Group has steadily endeavored to unwind such investments. Indeed, over the past two years, Samsung Group reduced the number of cross- shareholdings among group affiliates by more than 20 via intra-group stake deals. This trend is likely to continue going forward.
Currently, there are around 10 cross-shareholdings across Samsung Group—six that come back to Cheil Industries (Samsung SDI ‰ SEMCO ‰ Cheil Industries) and four that come back to Samsung C&T (Samsung SDI ‰ Samsung F&M ‰ Samsung C&T). The complete unwinding of circular shareholding will require affiliates to dispose of their stakes in Cheil Industries and Samsung C&T.
For Samsung Group, it is essential to reinforce Cheil Industries’ control over the group via Samsung C&T’s stake in SEC. Indeed, Samsung C&T plays a key role in controlling SEC, holding the second- largest stake in the electronics giant (4.06%) among Samsung companies, after Samsung Life.
TableTableTable 555.5. RRRecentRecent changechangessss tototo crosscrosscross-cross ---shareholdingsshareholdings Details DateDateDate
Increase (4) Life sold its stakes of C&T (4.7%) to F&M (4) Jun. 13 th , 2014 C&T sold its stakes of Card (2.5%) to Life (6) Dec. 17 th , 2014 E&M sold its stakes of Card (3.8%) to Life (6) Dec. 17 th , 2013 Card sold its stakes of the former Cheil Industries (4.7%) to SEC (10) Jun. 3rd , 2014 Decrease (24) Life sold its stakes of C&T (4.7%) to F&M (9) Jun. 13 th , 2014 SDI merged with the former Cheil Industries (10) Jul. 2nd , 2014 Card sold its stakes of Cheil Industries (5.0%) by secondary distribution (4) Dec. 17 th , 2014 Notes: As of 1Q15; Former Cheil Industries refers to the non-surviving entity in the Samsung SDI-Cheil Industries merger Source: KDB Daewoo Securities Research
TableTableTable 666.6. Current crosscrosscross-cross ---shareholdingshareholdingshareholdingss (((b(bbbeforeefore Cheil IndustriesIndustries----SamsungSamsung C&T mergermerger)))) (%)(%)(%) Affiliate 111 Affiliate 222 Affiliate 333 Affiliate 444 Affiliate 555 Affiliate 666 Affiliate 777 Subject to removal Cheil Samsung Cheil 1 → → SEC → SEMCO → Industries Life Industries 19.34 7.21 23.69 3.70
Cheil Samsung Samsung Cheil 2 → → → SEC → SEMCO → SEMCO Industries Life F&M Industries → Cheil 19.34 14.98 1.26 23.69 3.70 Industries
Cheil Samsung Samsung Samsung Cheil 3 → → → → SEC → SEMCO → Industries Life F&M C&T Industries 19.34 14.98 4.79 4.06 23.69 3.70 Cheil Samsung Samsung Cheil 4 → → SEC → → Industries Life SDI Industries 19.34 7.21 19.58 3.70
Cheil Samsung Samsung Samsung Cheil 5 → → → SEC → → Samsung SDI Industries Life F&M SDI Industries → Cheil 19.34 14.98 1.26 19.58 3.70 Industries
Cheil Samsung Samsung Samsung Samsung Cheil 6 → → → → SEC → → Industries Life F&M C&T SDI Industries 19.34 14.98 4.79 4.06 19.58 3.70
Cheil Samsung Samsung Samsung Cheil 7 → → SEC → → → Industries Life SDI C&T Industries 19.34 7.21 19.58 7.39 1.37
Cheil Samsung Samsung Samsung Samsung Cheil 8 → → → SEC → → → Industries Life F&M SDI C&T Industries Samsung SDI → Samsung C&T 19.34 14.98 1.26 19.58 7.39 1.37
Samsung Samsung Samsung 9 → → → SEC Electronics SDI C&T 19.58 7.39 4.06 Cheil Samsung Samsung Samsung Cheil 10 → → → → Industries Life F&M C&T Industries Samsung F&M → Samsung C&T 19.34 14.98 4.79 1.37 Notes: “Subject to removal” column denotes stakes that would have to be sold to unwind the group’s circular shareholdings Source: KDB Daewoo Securities Research
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May 27, 2015 Holding Companies
We believe the merger will allow the group’s controlling family to gain control over Samsung C&T. As such, once the merger is finalized, we believe Samsung SDI and SEMCO will successively liquidate their holdings in the combined entity, thereby unwinding the group’s circular shareholding structure and leading to massive cash inflow.
TableTableTable 777.7. Expected ccrossrossrossross----shareholdingshareholdingshareholdingssss (((after(after mergermerger)))) (%) Affiliate 111 Affiliate 222 Affiliate 333 Affiliate 444 Affiliate 555 Affiliate 666 Affiliate 777 Subject to removal New New Samsung Samsung 1 Samsung → → SEC → → Samsung Life E&M C&T C&T 19.34 7.21 23.69 2.64
New New Samsung Samsung Samsung 2 Samsung → → → SEC → → Samsung Samsung E&M Life F&M E&M → C&T C&T New Samsung C&T 19.34 14.98 1.26 23.69 2.64
New New Samsung Samsung Samsung Samsung 3 Samsung → → → → SEC → → Samsung Life F&M C&T E&M C&T C&T 19.34 14.98 4.79 4.06 23.69 2.64 New New Samsung Samsung 4 Samsung → → SEC → → Samsung Life SDI C&T C&T 19.34 7.21 19.58 4.77
New New Samsung Samsung Samsung 5 Samsung → → → SEC → → Samsung Life F&M SDI C&T C&T 19.34 14.98 1.26 19.58 4.77 Samsung SDI → New Samsung New New Samsung Samsung Samsung Samsung C&T 6 Samsung → → → → SEC → → Samsung Life F&M C&T SDI C&T C&T 19.34 14.98 4.79 4.06 19.58 4.77
New Samsung 7 SEC → → Samsung → SEC SDI C&T 19.58 4.77 4.06 New New Samsung Samsung 8 Samsung → → → Samsung Samsung F&M Life F&M → C&T C&T New Samsung C&T 19.34 14.98 1.38 Notes: “Subject to removal” column denotes stakes that would have to be sold to unwind the group’s circular shareholdings Source: KDB Daewoo Securities Research
Figure 666.6. Samsung GGGroupGrouprouproup’’’’ss current crosscrosscross-cross ---shareholdingsshareholdings Figure 777.7. Samsung GGGroupGrouprouproup’’’’ssss expected crosscrosscross-cross ---shareholdingsshareholdings
(before merger) (after merger)
Source: KDB Daewoo Securities Research Notes: Cross-shareholdings may be eliminated once the holdings marked with an “x” in the chart are liquidated Source: KDB Daewoo Securities Research
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May 27, 2015 Holding Companies
Figure 888.8. Value of stakes in Samsung C&T and Cheil IndustriesIndustries Figure 999.9. Value of stakes in Samsung C&T and Cheil IndustriesIndustries
heldheldheld by Samsung SDI heldheldheld by SEMCO
(Wbn) (Wbn) 10,000 5,000 4,736
8,664 8,000 4,000
6,000 3,000
4,000 2,000 Stake value relative to market cap:19.3% Stake value relative to market cap:19.8%
C&T: 939 2,000 7.39% 1,000 Cheil Cheil 733 Industries: Industries: 939 3.7% 3.7% 0 0 Market cap Value of stakes Market cap Value of stakes
Notes: May 26 th closing price Notes: May 26 th closing price Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
2. SEC to transition to an intermediate holding structure
For the controlling family, maintaining firm control over SEC is essential to the generational ownership transition. However, strengthening control via circular shareholdings is no longer an option for the family, due to the government’s ban on new cross-shareholdings and the group’s budget constraints.
Therefore, the only viable way for the group to raise its SEC stake would be to turn the electronics giant into a holding company. Establishing SEC as a holding company would allow the group to secure stable ownership in the holding company and the electronics operating subsidiary via holdings in Samsung SDS, SEC’s share buybacks, and tender offers.
TableTableTable 888.8. SECSECSEC’SEC ’’’ss majomajomajormajo rrr shareholders (%, Wbn) NameNameName Shares Ownership ValueValueValue Lee Kun-hee 4,985,464 3.38 6,790 Hong La-hee 1,083,072 0.74 1,475 Controlling family (1) Lee Jae-yong 840,403 0.57 1,145 TotalTotalTotal 6,908,939 4.69 9,410 Samsung Life 10,622,814 7.21 14,468 Samsung C&T 5,976,362 4.06 8,140 Samsung F&M 1,856,370 1.26 2,528 Samsung Welfare Affiliates (2)(2)(2) 89,683 0.06 122 Foundation Samsung Foundation of 37,615 0.03 51 Culture TotalTotalTotal 18,582,844 12.62 25,310 Holdings in the group (1) + (2) 25,491,783 17.31 34,720 Treasury stock 17,986,686 12.21 24,498 National Pension 11,164,905 7.58 15,207 OtherOtherOther Service Other 92,655,963 62.90 126,197 TotalTotalTotal 147,299,337 100.00 200,622 Note: Ownership as of 1Q14; Value as of May 26th closing price Source: Dart, KDB Daewoo Securities Research
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May 27, 2015 Holding Companies
Figure 101010.10 . SEC is likely to be converted to a holding company structure
Source: KDB Daewoo Securities Research
Some market participants are cautiously predicting a merger between SEC and Samsung SDS, given that the Special Act for Business Restructuring Support (the so-called “one-shot law ”) will likely loosen requirements for small-scale mergers once it is approved (likely in 2H). In particular, the law will exempt shareholder resolutions when newly issued shares for a merger account for less than 20% of outstanding shares (currently less than 10%). Theoretically, once the new law goes into effect, the two entities could merge immediately by resolution of their boards