Governance Issues
As Samsung Group has reportedly been continuously working on creating a holding company as scheduled, the governance structure is emerging as an issue again. In particular, a series of companies are expected to establish the holding company system by the end of the first half of this year when the amendment to the Commercial Law, which bans the utilization of treasury stocks, passes the special session of the National Assembly in March. This is because companies can use treasury stocks only when they complete the equity spin-offs, the first step to change into the holding company system.
According to investment banking industry sources on March 15, the market is paying more attention to both companies which have decided to create a holding company like Hyundai Heavy Industries and companies which are expected to build a holding company including Samsung Electronics. NH Investment & Securities said that most companies from conglomerates such as SK and CJ to small and mid-size companies which had equity spin-offs last year saw their market capitalization increase in the process of transitions to a holding company. The market capitalization of Sempio, which announced its plan for spin-off on February 23 last year, increased 48.6 percent from the announcement to the spin-off date, 81.6 percent to the IPO date and 80 percent to a month after the IPO.
Samsung Group also plans to turn Samsung Electronics into its holding company through the spin-off as scheduled. Chung Dae-ro, an analyst at Mirae Asset Daewoo, said, “The group will spin Samsung Electronics off to a holding company before the amendment which prohibits from using treasury stocks go through the National Assembly. As it announced in November last year to conduct a thorough review for six months, it will discuss whether to actually turn into a holding company system within May. Kim Dong-yang, an analyst at NH Investment & Securities, said, “Considering the fact that it takes more than three months for the process of a spin-off decision at the board of directors, special decision at the general meeting of stockholders and registration of the spin-off, Samsung Electronics needs to make decision for a spin-off by the end of April conservatively. Samsung Electronics will be the largest beneficiary in moving over to a holding company system. Lee Sang Hun, an analyst at HI Investment & Securities, said, “Given various conditions, Samsung Electronics Holdings and Samsung C&T are likely to be merged three to four years later.”
Lotte Group also plans to accelerate the adoption of a holding company structure by appointing Lotte Group Chairman Shin Dong-bin as an internal director of Lotte Chilsung Beverage at the annual general shareholders' meeting on the 24th. The four companies – Lotte Shopping, Lotte Food, Lotte Confectionery and Lotte Chilsung Beverage – announced in January that they are considering a way among three options of spin-off, merger, and spin-off and then merger, to establish a holding company. Yoo Jeong-hyun, an analyst at at Daishin Securities, said, “The value of Lotte Confectionery is highly likely to continuously rise as the family of the largest shareholders can acquire additional shares first by integrating the four affiliates into an interim holding company. In the process, the value of Lotte Shopping is also expected to increase due to possible IPOs of non-listed subsidiaries owned by Lotte Shopping.”
Not only conglomerates, such as Samsung and Lotte, but also small and mid-size companies are accelerating the establishment of a holding company structure. This is because the requirement of total assets for a holding company structure will increase from the current 100 billion won (US$88.42 million) to 500 billion won (US$442.09 million) in August, along with the amendment to the Commercial Law. Accordingly, smaller businesses, including Sempio, Home Center, Jeil Pharm, Ubiquitous and AP System, have announced to change its structure to a holding company one after another from last year. Food and beverage companies are making the fastest movement. Orion Confectionery and Maeil Dairies are about to establish a holding company system after Crown Confectionery, which officially created a holding company on the 1st. Maeil Dairies will hold a general meeting of shareholders to get approval for its spin-off plan on the 24th. The total assets of Maeil Dairies are 192.9 billion won (US$170.53 million) so the company needs to turn into a holding company structure before the required assets for a holding company rise. Analyst Kim Tae-hyun said, “The combined market capitalization of operating company and Investment Company is estimated at 835.6 billion won (US$738.55 million) after an equity spin-off. Considering the market capitalization which is reflected the target price of 55,000 won (US$48.61), the value can show an additional increase of more than 11 percent in the future.”