South Korea Court Ruling Raises Likelihood of Samsung Merger

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A South Korean court ruled in favor of the nation’s most-powerful corporate family, helping Samsung Group’s campaign to fend off a challenge from billionaire activist investor Paul Elliott Singer.

The court rejected a request from Elliott Associates LP to block a Samsung C&T Corp. shareholders meeting this month that will include a vote on a takeover by affiliate Cheil Industries Inc. The court will rule ahead of that meeting on a second injunction requested by Elliott to stop a Samsung ally from voting treasury shares bought from the target.

Today’s ruling by the Seoul Central District Court paves the way for the July 17 meeting, making it more likely the merger will proceed. It’s a relief to the nation’s largest conglomerate and the Lee family that controls it as they prepare for a once-in-a-generation leadership transition from hospitalized Samsung patriarch Lee Kun Hee.

“I see the merger proceeding as planned, as it will be tough for Elliott to find issues with the merger within Korean rules,” said Lee Jin Woo, money manager at KTB Asset Management Co., which oversees $10 billion. “The court decision was just as expected.”

Samsung C&T Corp. shares rose as much as 3.6 percent following the ruling, and traded up 1.4 percent at 67,100 won as of 12:55 p.m. in Seoul. Cheil Industries rose 2.3 percent while the benchmark Kospi gained 1 percent.

Family Grip

“There is no reason to say that the merger harms Samsung C&T and its shareholders while only benefiting Cheil and its shareholders alone, given that the share price of Samsung C&T rallied shortly after the merger was announced,” the court said in a statement on the ruling.

Cheil’s acquisition of Samsung C&T would tighten the grip of 47-year-old Lee Jae Yong, the founder’s grandson, as he positions himself to take control of the chaebol, a collection of 67 companies generating about $270 billion in annual revenue.

In the proposed deal, the de facto holding company Cheil would acquire Samsung C&T, solidifying Lee family control over crown jewel, Samsung Electronics Co. C&T also owns about $10.7 billion of group company shares, making it a vital asset to Lee and his siblings who control Cheil.

Singer took a stake in Samsung C&T and has argued that the $8.7 billion all-stock takeover offer “significantly undervalues” the target’s worth. Cheil’s bid is valued about 6.2 percent below C&T’s latest closing price, according to data compiled by Bloomberg.

Undervalued Proposal

The proposed deal would pass 7.8 trillion won ($7 billion) of C&T book value to Cheil without compensation, according to Elliott.

The all-stock offer adheres to a South Korean law that requires mergers to be valued based on a pre-determined formula that averages prices over the preceding month, Cheil has said.

“The merger ratio was measured based on relevant laws,” the court said in today’s statement. “Therefore, we can’t say the merger ratio of this case is significantly unfair.”

Samsung C&T welcomed the court ruling and said it affirms that legal requirements on the merger ratio have been met.

“We strongly believe that the proposed merger is in the best interest of the company and our shareholders,” Samsung C&T said in an e-mailed statement.

Still, today’s verdict doesn’t guarantee a victory for either party at the shareholder meeting. The deal needs the approval of at least two-thirds of votes with both sides lobbying other investors to join their campaigns.

Pension Decision

Elliott’s other injunction is trying to stop KCC Corp., an ally of the Lee family, from voting Samsung C&T treasury shares it bought on June 11 in favor of the deal. The court said today it would make a decision before the shareholder meeting.

“We will continue to seek to prevent the proposed merger from being consummated, and we urge all Samsung C&T shareholders to do the same,” Elliott said in an e-mailed statement. The fund says it still considers the offer unfair.

Both Samsung and Elliott are waiting on C&T’s single biggest investor, South Korea’s National Pension Service, to make its decision on the merger. The fund, which has more than $400 billion in assets and is overseen by the nation’s health ministry, has declined to comment on how it will vote.

Although the fund sided with management 91 percent of the time last year, it made a rare move on June 24 when it opposed a merger involving arms of SK Group, the nation’s third-largest conglomerate, which it said wasn’t in the best interests of all shareholders. The deal was approved two days later.

Behind the sporadic challenges to the chaebol are concerns about founding families making unfettered decisions at the expense of other shareholders. Perceived weak corporate governance is among the key reasons why Korean stocks typically trade at lower valuations than global peers.

For more, read this QuickTake: Samsung

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