In the fight between a foreign hedge fund and the biggest conglomerate in South Korea, the state-run pension may have the swing vote. It will probably side with Samsung Group for reasons that go beyond nationalism.
Korea’s National Pension Service is the biggest shareholder in Samsung C&T Corp. with 10.15 percent of common shares, making its support vital to U.S. activist investor Paul Elliott Singer in his attempt to block a proposed takeover of the company by another Samsung affiliate, Cheil Industries Inc.
It’s a common position for South Korea’s biggest investor. The NPS is used to being caught between the competing interests of business stalwarts and minority shareholders. Its stakes in at least 12 listed Samsung affiliates, worth $17.8 billion, may force its hand on C&T because with the takeover so integral to Samsung’s once-in-a-generation leadership transition, the fund can’t evaluate the deal in isolation.
“For investors who only have C&T shares the decision may be easy, as they can oppose the deal if they agree with Elliott,” Albert Yong, chief executive officer at Petra Capital Management, which oversees about 450 billion won ($409 million) including C&T shares, said by phone in Seoul on Monday. “But for investors like the NPS who have stakes in other Samsung affiliates, it’s more complicated. The collapse of this deal could bring losses to its other holdings.”
Opposition to the takeover, to be decided on July 17, has centered on its benefit to Samsung’s ruling Lee family and their vested interest in securing a low price for C&T. Elliott said last week the proposed deal would pass 7.8 trillion won of C&T book value to Cheil without compensation.
Cheil is offering 9.41 trillion won ($8.6 billion) of stock for C&T, lower than the $10.8 billion that C&T holds in shares of Samsung affiliates.
Other investors have sided with Elliott including APG Groep NV, the world’s second-largest pension fund. Altogether, foreigners hold 33 percent of C&T’s common shares, according to data from Korea Exchange. That compares with a combined 19.8 percent of common shares held by presumed Samsung allies that include the Lee family and group affiliates.
The NPS’s decision at C&T’s extraordinary general meeting next month is therefore crucial. For the deal to pass, at least two thirds of those attending the meeting and at least one third of shareholders with voting rights must vote in favor.
“The NPS investment office is still reviewing the issue,” spokeswoman Chi Young Hye said, declining to elaborate on its probable stance or on issues related to the decision. Chi also declined to confirm the value of the pension’s holdings in Samsung affiliates.
Shares of Samsung C&T rose 4.2 percent to 67,000 won in Seoul on Tuesday. Cheil gained 5.5 percent to 181,500 won.
The pension, whose local stock holdings accounted for 6.4 percent of the benchmark Kospi index as of March, said last year it plans to exercise its shareholder rights more actively.
It didn’t support Samsung Group’s 2.5 trillion won merger of its shipbuilding and engineering units, which failed after dissenting shareholders sought to sell more than 1.5 trillion won of the stock back to the companies. The NPS also voted against the reappointment of Mando Corp.’s chief executive officer on grounds that he damaged shareholder interests when approving the bailout of an affiliate.
The fund rejected about 9 percent of proposals put forward by Korean companies last year compared with 11 percent in 2013, according to the health ministry, which oversees the fund.
It’s unlikely to go against Samsung this time, said analysts including Lee Sang Hun at HI Investment & Securities Co. That’s in part because C&T’s stock has risen above the buyback offer available to those who oppose the takeover.
“The Cheil-C&T merger is different from the Samsung Heavy-Engineering deal,” Lee said. “I don’t see a single reason for the pension fund to oppose it. Cheil and C&T shares will drop if the deal is scrapped.”
The NPS has stakes in at least 12 listed Samsung affiliates, according to calculations based on data compiled by Bloomberg, including companies also held by C&T that have made Cheil’s proposed takeover so controversial. The NPS is the largest outside shareholder in Samsung Electronics Co.
“The merger makes it possible to lift the value of other Samsung shares held by C&T when it eventually sits at the top of the empire, but if the deal fails that hope will vanish with it,” said Baek Gwang Je, a Seoul-based analyst at Kyobo Securities Co. “For the pension fund seeking the highest possible returns, betting on the merger is beneficial.”
Even so, chaebol watchdogs are calling for the NPS to oppose, arguing that a vote in favor of Samsung would be another example of special treatment for the country’s industrial titans at the expense of minority shareholders.
They point to the NPS’s “principle of public benefit” as proof that the fund has a responsibility to promote better corporate governance that harms the valuation of South Korean companies, which trade at lower multiples than their peers in a phenomenon known as the ‘Korea discount.’
“The pension fund will need good grounds to approve the merger,” said Kim Sang Jo, executive director at the Solidarity for Economic Reform and an economics professor at Hansung University in Seoul. “Instead of a plea for patriotic votes, Samsung needs to offer a longer term plan on how to improve shareholder value.”