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(News Focus) Samsung at a crossroads amid restructuring

2015/05/08 09:00

By Kim Seung-yeon

SEOUL, May 8 (Yonhap) -- Two days before Samsung Group Chairman Lee Kun-hee collapsed from a heart attack at his house a year ago, the market hailed the group's announcement that Samsung SDS Co., a key unit of South Korea's top family-owned conglomerate, would go public in November.

Nearly a month later, Cheil Industries Inc., Samsung's clothing arm and virtual holding company, announced its plan for an initial public offering, stoking speculation over a leadership change to Lee Jay-yong, the vice president of Samsung Electronics Co. and son of the bedridden patriarch.

As Samsung marks the one-year absence of the elder Lee at its helm on Sunday, keen market attention is now on how the group's governance structure will be restructured.

Regulatory filings show that Samsung has made numerous equity transactions in recent years -- stake sales and share buybacks -- among its financial and non-financial affiliates in the run-up to its governance overhaul.

"It has been placing financial arms under the wing of Samsung Life Insurance Co., whose largest shareholder is the elder Lee. Financial units, on the other hand, have been disposing of their stakes in non-financial units," Kiwoom Securities Co. said in a recent report.

Market watchers say Samsung's moves signal that it is seeking to terminate a complex cross-shareholding structure, by which the Lee family has kept control over the group with only a handful of stakes.

A string of big deals that followed also underpin Samsung's long-term plan to become a holding firm by disposing of less profitable businesses and increasing treasury stocks in flagship units since it can be converted to voting rights under the holding company system, according to them.

In November 2014, Samsung took the market by surprise with a decision to sell off its four petrochemical and defense units to Hanwha Group for 2 trillion won (US$1.84 billion).

Samsung Electronics bought back its shares worth 1 trillion won and raised its stake in Cheil Industries by 10 percentage points to 28.6 percent.

The most viable scenario for the younger Lee's way to succession is to split Samsung Electronics, the crown jewel of the group, into two holding firms over the next few years: one for investment and the other to focus on business.

The investment holding company would later merge with Cheil Industries, of which more than a combined 40 percent stake is held by the chairman's three children.

Another possibility is making the life insurance arm a financial holding firm and put the rest of Samsung's financial units under its wing, but this needs a law revision that is currently under way, according to the watchers.

Analysts say that an overhaul of the governance structure of the group with over 300 trillion won in assets has become all the more inevitable since the times may not be favorable for Lee Jay-yong to inherit his father's $13 billion fortune.

"There have been growing calls for a reform of governance, more transparency for ownership structure and to make rules that boost shareholders' rights," said Noh Keun-hwan, an analyst at Korea Investment & Securities Co.

Lawmakers have pushed for tighter rules in corporate cross-ownership. There is a pending bill that further lowers the maximum stake a financial company can own in its manufacturing affiliate.

Samsung's weblike cross-shareholding structure has helped chairman Lee maintain control over Samsung Electronics through his 21 percent stake in Samsung Life Insurance, which holds a 7.21 percent stake in the tech firm.

Samsung has repeatedly denied the holding-firm theory, saying it "has no such a plan as it will incur a tremendous amount of costs and nothing has been decided for the group's future overhaul." A Samsung spokesperson declined to comment.

Analysts expect the 46-year-old scion will need to pay 6 trillion won in inheritance tax when he takes over his father's stock holdings worth about 12 trillion won as of the end of 2014.

But they say the price may not be of concern for Lee. After the listing of Samsung SDS, the value of his 11.25 percent stake in the IT service unit has ballooned to 3.2 trillion won, among other stocks he already owns.

In any case, few analysts disagree that Samsung is set to break up into holding firms in the next three or four years, if not for now.

"Changing into a holding company will cost a great deal. It's more plausible that Samsung will wait until the valuations of Cheil Industries and Samsung SDS perk up," said Lee Sang-hun, an analyst at Hi Investment & Securities Co.

Lee Jay-yong built his footing in the group by acquiring the stakes from Samsung units in the 1990s at a heavily discounted value, which later led to lawsuits against the chairman and his former executive staffs on charges of negligence.

They were found partially guilty, sparking criticism against families of conglomerates, known here as chaebol, for being easily pardoned for the often questionable legitimacy in succession.

Considering the reputation of Samsung, not only in terms of its economic power but social impact as the most successful global enterprise, a departure from the cross-shareholding is necessary for the younger Lee to justify his power takeover in a more transparent manner and dispel doubts about his untested capability to run the group after his charismatic father, analysts say.

"(Lee needs to show) a blueprint for Samsung's next 30 years. That it will be a good to great company. This is why Samsung is likely to sacrifice high costs because he won't be able to do that without a solid leadership," Noh said.

elly@yna.co.kr

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