Signal of Accelerating Managements Right Transfer to Third Generation

At a November 4 board meeting, Samsung Everland decided to establish a wholly-owned subsidiary called Samsung Welstory by separating the food service and food ingredient distribution businesses that account for 45% of its total sales. The company also made a decision to transfer its building/asset management business, which makes up 10% of its total income, to Samsung Group’s security firm S-1, for 480 billion won (US$451.7 million). With the decision, Everland will be restructured into an engineering and asset (construction, energy, landscaping), resort, and newly-added fashion business. 

The corporate takeover and restructuring efforts by the company are drawing a lot of attention in the industry. It is at the top of the group’s corporate governance. Therefore, many expect that it will play the most important role in the hand-over of management rights in the future. To be more specific, Samsung Everland holds a 19.3% stake in Samsung Life, which in turn owns a 7.3% stake in Samsung Electronics. Through its cross-shareholding structure, Everland governs the group.

Currently, more than 40% shares of the soon-to-be restructured company are owned by the three children of Samsung Group Chairman Lee Kun-hee. For example, Lee Jae-yong, vice chairman of Samsung Electronics, is the largest shareholder with a 25% stake in Everland. Lee Boo-jin, President of Hotel Shilla and Samsung Everland, and Lee Seo-hyun, Executive Vice President of Cheil Industries’ apparel business, hold an 8.37% stake each.

Moreover, Everland’s decision came on the heels of its takeover of the apparel business in September. Therefore, industry analysts are saying that this move is part of Samsung’s preparation to transfer management rights to the third generation of its founder. 

Experts in the financial world are expecting that the handover of Cheil Industries’ fashion division to the de facto holding company of the group will result in Lee Seo-hyun’s transfer to Everland at the end of this year. 

Some in the industry think that the food service and food ingredient distribution businesses are likely to be transferred to Hotel Shilla, since hotel and food businesses are related. 

Everland’s engineering unit is also receiving a lot of attention. Inside the group, Samsung Everland, Samsung C&T Engineering & Construction Group, Samsung Engineering, and Samsung Heavy Industries are all engaged in the engineering business. In light of the recent incident that Samsung C&T increased its share of Samsung Engineering to 2.3%, some predict that the engineering field will be reorganized as well. 

However, others believe that the recent corporate restructuring moves are aimed at evading the government’s regulations on internal trading. 

According to the amended enforcement ordinance of the Fair Trade Act, conglomerates’ affiliates will be subject to the revised law from February next year, if the owning family holds more than 30% of shares of listed companies, or over 20% shares of unlisted firms. In addition, the law will regulate any companies whose trading with group subsidiaries exceed 12% of annual revenues, or those with more than 20 billion won (US$18.9 million) in total internal trading.

As for Everland, internal trading represents 46.4% of the total. But after a number of business transfer, the percentage can be lowered to less than 30%.

Related to the November 4 decision, a spokesperson for Samsung Everland commented, “In line with our acquisition of Cheil Industries’ apparel business, we decided to proceed with sales and separation of businesses irrelevant to design or content. On top of that, it was necessary to secure funds due to our purchase of Cheil’s fashion unit and investment in next-generation businesses such as bio-related businesses.” 

The spokesperson added, “This decision has nothing to do with any change in our role as a holding company, or succession of management rights. Also, we did not make the decision to avoid regulations on internal trading.”