A U.S. activist hedge fund on Thursday stepped up its offensive on Samsung Group's move to merge two key units, demanding the merger be carried out in such a way to properly reflect the interests of relevant shareholders.
Elliott Management has challenged the 8.9 trillion-won ($7.95 billion) takeover bid by Cheil Industries Inc., the de facto holding company of Samsung, to buy construction arm Samsung C&T Corp., claiming that the deal undervalues the builder and is against shareholders' interests.
The proposed merger is seen as crucial for a smooth succession for Lee Jay-yong, the only son of Lee Kun-hee, the patriarch of the country's largest conglomerate, to help consolidate his grip on the group, whose businesses range from electronics to finance.
Elliot, the third-largest shareholder in Samsung C&T, has applied for a court injunction seeking to block what it calls an unwarranted merger, with the first court hearing slated for Friday in Seoul.
In a statement, the hedge fund, led by billionaire activist Paul Singer, said it understands the need for restructuring at the conglomerate but still sees the proposed deal as "unfair and unlawful."
"(Elliott) is supportive of the restructuring move in connection with the potential succession of control over it, (but) the terms of the proposed takeover (are) significantly damaging to the interests of Samsung C&T's shareholders."
In the statement posted on its website (www.fairdealforsct.com), Elliott argued against Samsung's claim that the terms of the merger are based on the affiliates' market values, because the current values do not reflect their real prices from the start.
The U.S. firm pointed out that the merger ratio of 0.35 Cheil Industries share for one Samsung C&T share, proposed by Cheil, is not a fair calculation.
It said the builder's stock value against its book value before the announcement of the merger was heavily underrated, with at least a 40 percent discount to its net asset value.
Samsung C&T has insisted that its price-to-book ratio of 0.64 stands at a similar level to its rivals. Elliott refuted this, saying that only makes sense if it counts all of the stakes it owns in other Samsung affiliates including crown jewel Samsung Electronics Co. Without those stakes, the ratio plunges to -0.06, the hedge fund said.
Elliott criticized that the share value of Cheil Industries, whose business portfolio stretches from apparel and materials to theme parks, is extremely inflated.
The ratio of its current share price to per-share earnings is forecast at 131 times for the next 12 months, versus 11 times projected for the broader KOSPI index. But that is an overvaluation given that Cheil is estimated by analysts to achieve around a 3 percent return-on-equity, while the KOSPI will likely generate 11 percent, Elliott said.
The investment firm noted that the proposed merger poses regulatory risks for Samsung Group, the top conglomerate in the country, as it would create a new circular shareholding structure.
In response to the statement, Samsung C&T said Elliott is repeating its claims and that the proposed merger is being carried out "lawfully" to maximize shareholder value as well as for the future of the firm."
Elliott also questioned Samsung's claim that the merger will bring synergy to both units, citing the vastly different nature of their businesses. It said the C&T shareholders might have to give up 7.8 trillion won in book value to Cheil "for no consideration."
In regards to the sale of Samsung C&T's 7.1-percent treasury shares to KCC Corp., the hedge fund said it was a "deeply alarming development," as it has diluted the voting rights of its shareholders.
"Any transaction proposals which are part of that restructuring must comply with all applicable corporate governance standards," it added. (Yonhap)
