Central Issue Is How to Maintain Grip over SEC
The authors are analysts of NH Investment & Securities. They can be reached at dongyang.kim@nhqv.com and junsup@nhqv.com, respectively. – Ed.
Samsung Group untangled its circular shareholding web in 2018, but one major issue is how to maintain grip over SEC
Having completely untangled its circular shareholding web in 2018, the Samsung Group is in compliance with governance structure laws. However, issues remain to be addressed. Currently, Samsung C&T, which is 31.6% owned by the founding family, is serving as a de-facto holding company for the group. Under Samsung C&T, there is Samsung Life and SEC, both of which hold financial and non-financial affiliates. Under this structure, one major issue is how to maintain grip over SEC, which is only 21.2% owned by GH Lee and related parties. As the largest shareholder in the non-financial company SEC is financial company Samsung Life (8.5% stake), Samsung Life’s stake ownership and exercise of voting rights might be put at risk upon changes in the regulatory environment.
Establishment of non-financial holding company looks impossible in light of regulation on minimum stake ownership in subsidiaries
Under the principle of separating industrial capital from financial capital, financial holding companies are governed by the Financial Holding Companies Act and non-financial holding companies by the Monopoly Regulation and Fair Trade Act. If the group adopts a holding company structure, it could create both financial and non-financial holding companies, or establish a financial holding company or a non-financial holding company. In our view, the group cannot choose to set up a non-financial holding company, as under the regulation that requires holding companies to own a 20% or greater stake in listed subsidiaries, its non-financial holding company would be forced to hold a 20% or greater stake in SEC (whose market cap surpasses W330tn). Accordingly, the only option is to create a financial holding company.
Adoption of financial holding company structure bodes well for group’s control over SEC
Let’s assume that the Samsung Group adopts a financial holding company structure, an idea that was advocated by the then-head of the Solidarity for Economic Reform in early 2016. If a financial holding company is set up via a spin-off of Samsung C&T or Samsung Life, subsidiary Samsung Life could not be the largest shareholder of non-financial company SEC, but it could be the second largest or a lower-ranked shareholder through the transfer of up to a 1.8% stake in SEC, maintaining its grip over SEC. In other words, if Samsung Life sells up to a 1.8% stake in SEC (market value of roughly W6tn) to Samsung C&T within the five-year grace period with which to comply with holding company restrictions (and an extension of up to two years under unavoidable circumstances), the group would be able to complete its financial holding company structure and maintain control over SEC.
Samsung C&T needs to reduce combined fair value of stakes in affiliates to below 50% of total assets
Considering its dividend income, it should be easy for Samsung C&T to finance the purchase of a 1.8% stake in SEC over a seven-year period. However, upon acquisition of the stake, Samsung C&T would become the largest shareholder of SEC with a 6.8% stake, which would make SEC its subsidiary (of note, its stake in SEC is currently classified as available-for-sale financial assets). In this case, the combined fair value of Samsung C&T’s stakes in affiliates would reach 60.2% of its total assets. Under the Korea’s Fair Trade Act stipulating that a firm be classified as a holding company when the combined fair value of its stakes in affiliates exceeds 50% of its total assets, Samsung C&T would be forced to become a non-financial holding company. Also, under the regulation on minimum stake ownership in subsidiaries, Samsung C&T would need to increase its stake in SEC to 20%, which would require an additional expense of around W44tn. Accordingly, in order to circumvent its transition to a non-financial holding company, Samsung C&T would need to make efforts to reduce the combined fair value of its stakes in affiliates to below 50% of its total assets, including increasing borrowing (for raising total assets)