Elliott’s Samsung attack may have staying power

October 5, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Elliott’s attack on Samsung Electronics may have staying power. The hedge fund wants the South Korean company to restructure, pay a $27 billion special dividend, pledge to return at least 75 percent of free cash flow to investors and agree to appoint some independent directors. Foreign activists often do poorly in Asia. But Elliott nearly won a battle with the family-run conglomerate over the summer.

Samsung is a textbook example of what pushy activists look for. Its stock trades at a 40 percent discount to a basket of its peers, according to Thomson Reuters’ estimated earnings for the next 12 months. It’s also facing problems with one of its flagship products, the Galaxy Note 7 smartphone, which had to be recalled as batteries were catching fire. And the Lee family, which controls the sprawling group of Samsung firms through cross-shareholdings, may be distracted: South Korea’s inheritance laws may leave its members facing a several-billion-dollar tax hit when ill patriarch Lee Kun-hee dies.

Elliott hopes its call for a split of Samsung Electronics into listed holding and operating companies will help get the Lee family onside. The activist wants the holding company to launch a tender offer for shares of the operating company, using its own treasury shares, and then merge the holding company and Samsung C&T in a share-for-share merger on fair terms. All in, that may allow the family to gain increased control over the operating company with some tax advantages.

That could make Elliott’s financial and governance demands, which will appeal to independent shareholders, easier to swallow. And it’s a different tack to the one Elliott took over the summer when it opposed a $9 billion merger between the family’s de facto holding company Cheil Industries and Samsung C&T. The transaction barely secured the two-thirds approval required, despite tactics such as the target company selling shares to friendly parties. The deal increased the family’s control over Samsung Electronics because C&T owned shares.

Of course, the Lee clan may reject Elliott’s latest assault out of hand, and nationalist chest-thumping might play a role, too. But the proposal may have surprisingly good chances of at least being entertained.

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