A Potential Transition to Financial Holding Company
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Samsung Group’s ‘third generation management’ era is officially underway. Despite its mix of industrial capital and financial capital, the group’s governance structure is in compliance with governance structure laws as it has untangled its circular shareholding web. With members of the founding family needing to dispose of some of their shares to finance inheritance tax payments of more than W10tn, dividend policy improvement is likely at affiliates in which the families possess stakes. Also in the cards is a potential transition to a financial holding company in order to strengthen major shareholders’ control over the financial domains and SEC.
Inheritance tax burden? Founding family members’ stake holdings to be focused on SEC and Samsung C&T; dividend policy to improve
Despite the recent passing of Samsung Group chairman GH Lee, the group’s basic governance structure is expected to remain unchanged. Although the group lacks a holding company structure and is composed of both of financial and industrial businesses, its governance structure is in compliance with government regulations as it completely untangled its circular shareholding web in 2018. The inheritance of GH Lee’s stakes is unlikely to result in certain affiliates being separated from the group and coming to be independently operated. In particular, we note that, regardless of the respective stakes that they hold in group affiliates, the chairman’s three children (ie, Samsung Electronics (SEC) vice chairman JY Lee, Hotel Shilla CEO BJ Lee, and Samsung Welfare Foundation chairman SH Lee) hold key management roles within the group. GH Lee’s combined stake holdings in group affiliates entails an estimated inheritance tax burden of W10.6tn (on a combined value of stakes in affiliates of W18.2tn). To finance the required payment, we believe that Lee’s three children will sell off some of their stakes in group affiliates (eg, Samsung Life and Samsung SDS), excluding SEC and Samsung C&T, considering SEC’s strong dividend payout and the importance of maintaining a firm grip on Samsung Group. Any shortfalls following the anticipated share disposals are likely to be amassed via strengthening of SEC’s dividend policy.
Control over Samsung Life to weaken? Potential transition to financial holding company
Even if the founding family members sell their positions in Samsung Life in order to meet the inheritance tax burden, they can still maintain control over the group’s financial domains by transitioning to a financial holding company structure by spinning off either Samsung C&T or Samsung Life. During such a process, Samsung Life would need to sell off just 1.8% of its stake in SEC to Samsung C&T for the group to retain control over the IT giant. That said, in order to circumvent a transition into a non-financial holding company, Samsung C&T would need to reduce the combined fair value of its stakes in affiliates to below 50% of its total assets. Also, considering the changes in the regulatory environment for non-financial holding companies, the transition would need to be completed within 2021.