Samsung Group Revamping Adds $22 Billion to Value: Korea Markets

Speculation that Samsung Group’s founding family will revamp South Korea’s biggest business empire to retain control has so far had an unlikely beneficiary: minority shareholders.

The conglomerate led by Lee Kun Hee, whose businesses account for more than 20 percent of South Korea’s economy, may unlock “hidden value” as 72-year-old Lee transfers wealth to heirs, CLSA Asia-Pacific Markets says. Speculation the changes will come soon has lifted the market capitalization of Samsung’s 17 listed companies by more than $22 billion since May 7 through yesterday.

Samsung Group may shift ownership into at least three holding companies that allow the family to retain control while reducing the need to tie up capital in cross shareholdings that could otherwise be invested in profitable projects, CLSA says. Samsung Electronics Co., which has the lowest price-earnings ratio among the world’s 20 biggest companies, rallied 7.7 percent in the past eight days, while Samsung C&T Corp., which helped build the tallest building in Dubai, rose 16 percent.

“We would support a restructuring, which adds transparency,” Julian Mayo, who helps manage about $2.7 billion in emerging markets, including Samsung Electronics shares, as the co-chief investment officer at Charlemagne Capital Ltd. in London, wrote in an e-mail on May 16. “The best investments are generally to be found where there is a long-term alignment of interest between the owners and managers of the company and its shareholders.”

Samsung Electronics rose 0.2 percent today to its highest level in more than five months at the close in Seoul, while Samsung C&T declined 2.3 percent. The benchmark Kospi index slid 0.2 percent.

IPO Plans

Samsung Group’s ownership structure has come under the spotlight this month after Samsung SDS, which provides technology for the construction and manufacturing industries, unveiled plans for an initial public offering on May 8, a move seen by Morgan Stanley as a way for Lee’s family to fund a restructuring of the group.

Lee moved to a general ward from intensive care yesterday, Samsung Group spokeswoman Rhee So Eui said by phone today. His condition has improved and all test results were stable, Rhee said. After Lee took over Suwon-based Samsung Electronics in 1987, he built it into the world’s largest maker of smartphones, televisions and memory chips, becoming South Korea’s richest man in the process.

Samsung declined to comment on ownership structure, spokesman Kevin Cho said by phone yesterday. The group, which generated about $325 billion in sales last year, hasn’t disclosed plans for restructuring or succession.

Holding Companies

“It is inevitable for Samsung to turn more friendly toward investors,” Seo Jae Hyeong, chief executive officer at Daishin Asset Management, which oversees about $3.8 billion, said in an interview in Seoul on May 15. “Shareholder return policies are most likely to strengthen through the succession process.”

Under CLSA’s scenario, the group would create holding companies for its technology, financial and industrial units. Samsung Electronics, South Korea’s biggest business by market value, would split into a holding company and an operating unit with better incentives to boost return on capital, according to Shaun Cochran, the country head of Korea at CLSA.

Investor interest in the group’s restructuring options has also spurred Morgan Stanley and JPMorgan Chase & Co. to outline their own projections in reports during the past three weeks. Morgan Stanley analyst Sara Lee picked Samsung C&T and Samsung Life Insurance Co. as the key beneficiaries under her scenarios for a revamp of the group, while JPMorgan strategist Scott Seo said a restructuring may have “profound implications” for the entire South Korean stock market.

Relative Value

President Park Geun Hye’s government introduced last year legislation banning family-run chaebol businesses from creating new cross shareholdings. The strategy was blamed by the International Monetary Fund for contributing to the nation’s 1997-1999 financial crisis and used by families to control conglomerates while holding only minority stakes.

The opaque ownership structures have also helped to cap equity valuations in South Korea, where the Kospi index trades at 10 times estimated earnings for the next 12 months, the lowest level among major Asian markets after China. Samsung Electronics’ multiple of 7.5 compares with 13 for Apple Inc., maker of the iPhone.

“Post restructuring, the family’s interest will become more aligned to minority shareholders, and the incentives to deploy capital in a far more efficient way will dramatically improve,” Cochran said in an interview in Seoul on May 19. CLSA has the equivalent of buy ratings on Samsung Electronics and Samsung C&T.

Stocks Climb

Even if Samsung takes steps to further align the family’s interests with minority shareholders, it faces slower growth in some of its biggest businesses, said Lee Jin Woo, a money manager at KTB Asset Management Co. in Seoul, which oversees about $7.2 billion. Samsung Electronics posted the lowest sales at its mobile-phone business in five quarters amid increasing competition with Chinese producers in the period ended March.

“The picture doesn’t look good for Samsung,” Lee said.

Still, shares of the group’s companies have outperformed the broader South Korean stock market since speculation of a restructuring intensified this month. The gain in Samsung Electronics is about twice as big as the 3.9 percent increase in the Kospi since May 7 through yesterday. Foreign investors added about $367 million to their holdings of the stock during the period, the most among Kospi companies. Samsung Life jumped 15 percent to the highest level in seven months.

“The hidden value across the entire Korean market cap could be better realized,” said CLSA’s Cochran.

(An earlier version of this story corrected the spelling of the name of the Samsung Group spokeswoman.)

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