Rumors on Mergers of Affiliates
As Samsung Group and Hyundai Motor Group are carrying out corporate governance structure reform in earnest, rumors about possible mergers between affiliates and business reorganization are resurfacing. Market experts say Samsung Group will push ahead with mergers between Samsung SDI Co. and Samsung Electronics Co. and between Samsung C&T Corp. and Samsung Engineering Co., while Hyundai Motor Group is likely to merge Hyundai Engineering and Construction Co. with Hyundai Engineering Co.
According to investment banking (IB) industry sources, Samsung Group sold off 4.04 million shares of Samsung SDI in Samsung C&T, or 2.13 percent, worth 559.9 billion won (US$525.23 million) in a block sale on April 11 in order to remove three of the seven cross shareholding links among Samsung Group affiliates. When the group sells off a 2.64 percent stake of Samsung Electro-Mechanics Co. and a 1.38 percent stake of Samsung Fire & Marine Insurance Co. in Samsung C&T, it will be able to completely remove the remaining four cross shareholding links.
If circular shareholding, which allows to take control of company with a small number of shares, is removed, there remains the control problem of founder’s family. The combined stake of Samsung’s owner family in its key affiliate, Samsung Electronics, amounts to 20.1 percent, including a 3.9 percent stake owned by Chairman Lee Kun-hee and a 0.6 percent stake owned by Vice Chairman Lee Jae-yong. Accordingly, there is a possible scenario of the merger based on Samsung SDS whose 22.6 percent stake is held by Samsung Electronics.
When the group splits off Samsung SDS’s IT service and logistics business process outsourcing (BPO) units and merges with Samsung Electronics, Vice Chairman Lee will be able to increase the stake in Samsung Electronics by exchanging his 9.2 percent stake in Samsung SDS and 0.6 percent stake in Samsung Electronics. Also, he can personally purchase the stake of Samsung Electronics by selling off a 17.1 percent stake of Samsung C&T whose 30.7 percent stake is owned by founder’s family in in Samsung SDS.
However, some industry sources point out that both scenarios will be difficult to obtain approval from society and shareholders. An official from the IB industry said, “Samsung Group, which failed to implement a holding company system, needs to grow Samsung C&T and expand the control of Samsung Electronics. It is hard to receive consent from the market and shareholders for such an owner family-centered split-off in the recent social atmosphere.”
In addition, there have been rumors about the merger with Samsung Engineering to streamline Samsung C&T. In fact, Samsung C&T’s construction division office moved into Samsung Engineering’s building on March 23. After Samsung C&T merged with Cheil Industries Inc. in 2016, it downsized its workforce in the construction sector and recently formed a task force to strengthen the competitiveness of engineering, procurement, construction (EPC) business.
Yoon Tae-ho, an analyst at Korea Investment and Securities Co., said, “It is difficult to expect a growth potential and profitability for the construction unit of Samsung C&T, except for orders from its affiliates. The business also overlaps with Samsung Engineering’s so the company needs to streamline the business and management. Its recent move to establish the task force to improve the EPC competitiveness is also in line with Samsung C&T’s efforts for business efficiency and portfolio reorganization.”
There are also rumors about the merger between Hyundai Engineering and Construction and Hyundai Engineering under Hyundai Motor Group, which recently announced its plans to improve governance structure based on Hyundai Mobis Co.
When the merger between Hyundai Mobis and Hyundai Glovis is completed, Hyundai Mobis’ major shareholders – Kia Motors Corp., Hyundai Glovis Co. and Hyundai Steel Co. – are planning to sell off their stakes in Hyundai Mobis to Hyundai Motor Group Chairman Chung Mong-koo and Vice Chairman Chung Eui-sun. Then, Hyundai’s owner family will need 5.5 trillion won (US$5.17 billion) of money in current market prices to purchase a total 23.3 percent of stakes in Hyundai Mobis.
Some say that unlisted Hyundai Engineering can be the source of the funds. Hyundai Engineering can be used through an initial public offering and the merger with Hyundai Engineering and Construction. Vice Chairman Chung now holds an 11.7 percent stake in Hyundai Engineering, which is currently worth 700 billion won (US$657.59 million).