Management Succession
It is expected that the shareholding structures of Samsung Group subsidiaries will be simplified, while the third-generation owners’ influence will continue to increase, as the listing of Samsung SDS and Cheil Industries draws near. In particular, the Samsung Group is forecast to adopt a holding company structure with the listing of Cheil Industries, which is at the top of the circular shareholding structure, advancing ahead of schedule. Still, many experts predict that the process will take at least some time, because such reform requires tens of trillions of won.
According to industry sources, Cheil Industries is planned to be listed on Dec. 18. According to the report it submitted to the Financial Supervisory Service on Oct. 31, approximately 28.75 million shares are to be prepared for the public offering, and 18.75 million out of the total are to be provided by Samsung Card (6.25 million), Samsung SDI (five million), and KCC (7.5 million). Samsung Card released 100 percent of its shares, unlike the other two.
Cheil Industries, 46.12 percent of which is owned by Samsung Electronics' Vice Chairman Lee Jae-yong and his family, has 19.34 percent of Samsung Life Insurance shares. Samsung Life Insurance has 6.55 percent of Samsung Electronics, which is the core of the entire Samsung Group. This is how Chairman Lee Kun-hee controls the Samsung Group. In addition, Samsung Electronics and Samsung Life Insurance own 37.45 percent and 34.41 percent of Samsung Card each, and Samsung Card is in possession of 5 percent of Cheil Industries shares. This means the share flow starting from Cheil Industries comes back to itself via Samsung Card.
This complex structure that allows multiple subsidiaries to be governed with a small amount of capital has been considered as an expedient for easier control by the owner’s family. Amid increasing controversy, the Samsung Group has announced that it would address the structure. Experts point out that the ongoing corporate governance reform ahead of the listing of Cheil Industries is a part of such efforts.
The Samsung Group split Cheil Industries into two late last year and then handed over the Samsung Card shares of Samsung Electro-Mechanics, Samsung C&T and Samsung Heavy Industries to Samsung Life Insurance. Also, it has consolidated Samsung General Chemicals with Samsung Petrochemical and Samsung Heavy Industries with Samsung Engineering.
The ultimate purpose of such a move is said to be the simplification of the shareholding structures, solidification of the management rights of the third-generation owners, and preparation for a subsidiary division among Vice Chairman Lee Jae-yong, Hotel Shilla President Lee Bu-jin, and Cheil Industries President Lee Seo-hyeon.
The three third-generation owners are supposed to gain a huge amounts of funds after the listing of Samsung SDS on Nov. 14, and the money is forecast to be spent as inheritance taxes and resources for share expansion in different subsidiaries. The only son has 11.25 percent of Samsung SDS, and each of the two daughters have 3.9 percent of its shares. When an offering price of 190,000 won (US$175) is applied, the three owners’ combined equity value in Samsung SDS amounts to 2.2 trillion won (US$2.03 billion). The amount jumps to 4 trillion won (US$3.7 billion) with a curb market trading price of 340,000 won (US$315). The amount is likely to keep going up, as securities companies’ target share price goes up to 500,000 won (US$463).
The subsidiary structure reform of the Samsung Group focuses on the minimization of succession costs and maximization of the family’s control. This is why conversion into a holding company structure using Samsung Electronics, Samsung C&T, or Samsung Life Insurance continues to be mentioned in spite of the denial by the Samsung Group.
The current law restricts new circular shareholding while providing tax incentives for holding companies. Establishment of a holding company by means of Cheil Industries, where the vice chairman’s shareholding ratio is high, can be an attractive option for Samsung as well, because he can better control Samsung Electronics by utilizing Cheil Industries with his share ratio in Samsung Electronics being limited to 0.57 percent now. “The vice chairman’s stockholder's ratio in Samsung Electronics Holdings would reach 7 to 8 percent, if Samsung Electronics was split into Samsung Electronics and Samsung Electronics Holdings, and then the latter was merged with Cheil Industries,” a local securities analyst predicted.
The problem is money. For the conversion, the shares of the subsidiaries have to be arranged. No less than 13 trillion won (US$12.0 billion) or so is estimated to be required for the holding company to buy the 6.55 percent of Samsung Electronics shares owned by Samsung Life Insurance. In addition, the current law blocks any financial company from acquiring 5 percent or more of shares of a non-banking subsidiary, and restrictions are present in share exchange between subsidiaries of business groups subject to the cross shareholding ban.
Another possible scenario is chairman Lee Kun-hee handing over his shares and fortune to his three children, and the income from the listing of Samsung SDS paid as an inheritance tax. This is supported by the fact that Samsung SDS has nothing to do with the cross shareholding of the Samsung Group, and the family does not necessarily have to keep the shares. “Still, we cannot rule out the possibility of the conversion into a holding company in that the fund acquired through the listing of Cheil Industries can be used for the conversion. Samsung Securities recently bought treasury stocks to signal such a transformation and a holding company has its own appeal,” an industry source commented.
“The various movements of the shares during the past three years are contradictory to the hypothesis about the maintenance of the current corporate structure,” said Korea Investment & Securities analyst Yoon Tae-ho, continuing, “It seems that Cheil Industries will control Samsung Electronics, while Samsung Life Insurance functions as an intermediate holding company.”
Professor Park Sang-in at the Seoul National University Graduate School of Public Administration remarked that the groundwork has been completed for the conversion via the listing of Samsung SDS and Cheil Industries, and public opinion and systemic changes to come will be determining factors.
“The Samsung Electronics share gained a bit as the governance issue came to light, but the stock price is still very underestimated now,” a source in the securities industry explained, adding, “Assuming that the price hits a trough early next year before continuing to rise for a while from then, Samsung is likely to start the conversion process in January or February next year.”