Samsung to Merge Shipbuilding, Engineering Arms in Revamp

Samsung Group, whose billionaire chairman has been hospitalized since May, will merge its shipbuilding and engineering units as South Korea’s largest conglomerate prepares for possible succession.

Samsung Heavy Industries Co. (010140), the world’s third-largest maker of ships, will combine with Samsung Engineering Co. (028050) before the end of the year in a deal valued at about 2.5 trillion won ($2.5 billion), according to regulatory filings from the two companies today. Shareholders of the engineering company will get 2.36 shares in the vessel maker in a merger that’s based on share prices of 26,972 won for Samsung Heavy and 63,628 won for Samsung Engineering, according to the filing.

“This is the start of more restructuring that’s to be expected from heavy-industry companies within the Samsung Group,” said Kim Hyung Gun, an analyst at Meritz Securities Co. in Seoul. “The group seems to have decided that it needed to revamp the units because there were too many overlapping areas, like in the construction business.”

Shares of both companies rose as the merger came amid a restructuring ahead of a potential succession at the top of the conglomerate. Lee Kun Hee, the 72-year-old chairman of phone-maker Samsung Electronics Co., has been hospitalized since suffering a heart attack in May, and the heir apparent is his only son, Lee Jae Yong. The family is planning to take public two businesses to comply with tighter government limits on chaebol and eventually help pay inheritance taxes that could exceed $5 billion.

Source: Samsung Heavy Industries Co. via Bloomberg News

An undated company handout shows Samsung Heavy Industries Co.'s shipyard in Geoje Island, South Korea. Close

An undated company handout shows Samsung Heavy Industries Co.'s shipyard in Geoje Island, South Korea.

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Source: Samsung Heavy Industries Co. via Bloomberg News

An undated company handout shows Samsung Heavy Industries Co.'s shipyard in Geoje Island, South Korea.

Declining Profit

South Korea’s (005930) government has banned new cross-shareholdings and offered tax breaks for restructuring of chaebols to become more transparent. One company going public is the Samsung Group’s de facto holding company, Cheil Industries, in which Jay Y. Lee, as the patriarch’s son is also called, holds a 25 percent stake.

Samsung Heavy rose 6.2 percent, the biggest jump since July 23, to close at 28,950 won in Seoul trading. Samsung Engineering jumped 13 percent, the most since December 2008, to 71,900 won.

While Samsung Heavy will keep its name for now, the company may consider changing it later, the two companies said in a joint statement. There won’t be any change to the workforce, they said. Samsung Heavy has about 14,300 workers and Samsung Engineering about 7,000, according to their latest financial statements.

The combined entity plans to increase sales to 40 trillion won in 2020, from 25 trillion won last year.

‘Good Merger’

“Through the merger, Samsung Heavy and Samsung Engineering will provide solutions for both onshore and offshore projects to customers,” the two companies said in the statement. An extraordinary meeting will be held on Oct. 27 to seek approval from their shareholders.

Samsung Heavy will tap into Samsung Engineering’s expertise in project management and design while the engineering company will be able to broaden its business to the offshore sector, the companies said.

The two companies are already working together on offshore projects, including one in Nigeria.

Samsung Heavy’s profit has declined in recent years as slowing economic growth and excess capacity led to a drop in new orders. By combining the two companies, the Seoul-based shipbuilder plans to use Samsung Engineering’s expertise for its offshore projects.

“This merger will be good for Samsung Heavy in the long term,” said Cho Byung Hee, an analyst at Kiwoom Securities Co. in Seoul. “Samsung Heavy will be able to tap Samsung Engineering’s expertise and engineers to help it differentiate itself from other shipyards.”

First-Half Loss

Samsung Heavy has been focusing on growing its offshore operations as overcapacity led to a drop in shipbuilding orders. Contracts for drilling and floating production facilities accounted for 71 percent of the $37 billion orderbook at the end of July.

Samsung Heavy posted a loss in the first half because delays in some of its offshore projects. The company, whose bigger rivals are Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co., won $5 billion in orders in the first seven months of this year, according to its website.

Samsung Engineering posted a loss last year, the first since 2003, because of delays in some of its overseas construction projects.

“This merger is the best option for Samsung Group, considering Samsung Engineering still has some losses to clear from overseas construction projects,” Kim at Meritz said.

Lee Kun-Hee, who took over from his father 27 years ago, is South Korea’s richest man, with a net worth of $11.5 billion, as of Aug. 29, according to the Bloomberg Billionaires Index.

To contact the reporter on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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