Elliott fires another salvo at Samsung merger

Hedge fund wages battle with Samsung's Lee family, filing an injunction against the sale of treasury shares as it attempts to derail Cheil Industries merger with Samsung C&T.

Activist hedge fund Elliott, founded by billionaire Paul Singer, fired another salvo at Korea's powerful Lee family on Thursday as it again tried to block the merger of Samsung group's de facto holding company Cheil Industries with Samsung C&T.

Elliott said that it applied for an injunction to prevent Samsung C&T from selling treasury shares to KCC, an affiliate of Cheil Industries. The treasury shares amount to a 5.7% stake in Samsung C&T.

“The attempt by the boards of Samsung C&T and Cheil Industries to force through this unlawful takeover proposal represents an effort to divert, without any compensation, more than 58% (equivalent to approximately W7.85 trillion) of Samsung C&T’s net assets out of the hands of the shareholders of Samsung C&T and into the hands of Cheil Industries’ shareholders,” Elliot said in a release.

The hedge fund, which famously took on the Argentinean government over a debt default in 2002, also filed an injunction on Tuesday to prevent the merger of Samsung C&T and Cheil Industries. Elliott owns 7.1% of Samsung C&T.

In South Korea treasury shares have no voting rights but companies often sell them to friendly parties when they are trying to shore up support for takeovers. Samsung affiliates own less than 15% of Samsung C&T.

The merger between Samsung C&T and Cheil Industries is crucial for the country's largest conglomerate as it re-organises ahead of an expected once-in-a-generation change in leadership.

Lee Jae Yong, heir apparent to the Samsung Group, is expected to step up and take control of the company after his 73-year-old father was hospitalised in May last year. The merger will enable the group to consolidate its grip on crown jewel Samsung Electronics. Construction company Samsung C&T holds a 4.2% stake in Samsung Electronics as well as stakes in other companies such as Samsung SDS.

Unfair exchange

The court hearing for Elliott's injunction on the merger will be held on June 19, with a pronouncement expected on July 2. In the past, South Korean courts have ruled on the side of companies selling treasury shares.

According to a note by research house Smartkarma, Sovereign Asset Management filed for an injunction against SK group back in 2003 and tried to stop SK group from selling its treasury shares to related parties. In the end the Seoul district court ruled in favour of the management.

At the heart of Elliott's contention is that the all-stock merger terms proposed in May undervalue Samsung C&T and are beneficial to Cheil Industries, which is 42.2% owned by the Lee family.

The swap ratio — one Samsung C&T share per 0.35 shares in Cheil Industries — is based on a formula and computed according to the preceding month's closing share prices.

However, observers note that the trading activity of both stocks was unusual prior to the deal being announced.

Since listing in December last year at W53,000, the Cheil Industries share price has more than tripled to W180,000 now. In contrast, Samsung C&T's stock has only headed south and had ebbed to three-month lows on May 21, shortly before the merger was announced on May 26.

Cheil Industries trades at about 144 times 2015 consensus earnings while Samsung C&T trades at 26.2 times, according to Bloomberg data — even though the latter's net assets are vastly greater.

According to the release by Elliott, the net asset value attributable to Samsung C&T is W13.4 trillion while those of Cheil Industries are W4.7 trillion, based on published net assets as of March 31.

However, based on the proposed merger ratio Samsung C&T shareholders will effectively get W5.6 trillion of net assets, while Cheil Industries shareholders will get W12.5 trillion of net assets.

Even if Cheil Industries wants to raise the offer price, it is unclear if it can do so. Unlike US-style takeovers, where buyers can sweeten a bid, under Korean law the merger ratio is worked out using a formula. According to a source familiar with the matter, there is the possibility of raising or lowering the price by 10% if material information leaks.

All eyes will then be on an extraordinary general meeting vote on July 17. One third of Samsung C&T shareholders need to vote at the meeting and Cheil requires two third of Samsung C&T shareholders to vote in favour for the merger to go through. National Pension Services, which holds about 10% of Samsung C&T, is expected to play a determining role in the vote.

The restructuring of Samsung Group — which includes a diverse range of businesses spanning televisions, smartphones, insurance and construction — will ensure that the heir apparent Lee and his siblings retain control of the company. The three heirs will face inheritance taxes of more than $5 billion out of their father Lee Kun-hee’s $11.2 billion fortune.

(This story was updated to correct Paul Singer's name)

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