Seoul: Samsung Electronics Co. didn’t quite come out and actually say it, but South Korea’s most valuable company is probably going to split as soon as next year.
Samsung’s stock reached its highest since going public in 1975 after saying it’s looking at a plan to turn itself into a holding company, and would have more to disclose on the issue at a later date.
The idea, unveiled on Tuesday, was presented as a way to improve shareholder value and address calls from Elliott Management Corp. for more responsive management.
Perhaps the most important reason for a break-up, however, is that Samsung and the founding Lee family would also see big benefits from such a split, with its shares surging to a record on Wednesday.
For decades, the family has maintained control with a complicated web of cross-holdings that has generally protected it from outside influence. In recent years, the system has come under fire from critics and South Korean officials who say it stifles competition and undermines corporate governance.
Elliott’s proposal to combine some businesses with the new holding company would let the Lee family preserve its sway and boost transparency and accountability.
“Converting Samsung Electronics into a holding company is an indispensable factor in the power transfer to the third generation of the owner family,” said Park Ju Gun, president of corporate watchdog CEOSCORE in Seoul. “The founding family will be able to secure stable management control over the group, which is the final goal of this whole process.”
Samsung shares gained 4.1% to a record 1,746,000 won in Seoul trading on Wednesday, extending this year’s gain to 39%.
Elliott popped its proposal last month, when the firm was mired in a massive recall of the fire-prone Note 7 phone and moving to elevate heir apparent Jay Y. Lee to a more pivotal role. Under the plan, Samsung would split into holding and operating companies, with the former likely to own about a 20% stake in the latter.
The proposal also called for merging Samsung C&T Corp., which owns more than 4% of Samsung Electronics, into the new holding company. Jay Y. would be able use his stake in C&T to solidify his position without a massive cash outlay.
Elliott says the plan would make Samsung Electronics’ business more transparent, simplify the ownership structure and provide tax benefits, all of which would push up the stock. Samsung will spend at least six months on the review, while offering investors additional cash payouts and promising to add at least one outside director to the board.
So far, however, Samsung chief financial officer Lee Sang-hoon said on a conference call that the review was limited to Samsung Electronics, and not Samsung C&T.
“We view the plan outlined by Samsung to be a constructive initial step,” Elliott affiliates Blake Capital and Potter Capital, through which the investment was made, said in an emailed statement. “We anticipate more meaningful changes following the corporate structure review.”
Samsung said it will use 50% of free cash flow in shareholder returns for this year and next, indicating a return of about 9.5 trillion won ($8.1 billion) in 2016. Elliott had sought a special dividend of 30 trillion won.
Billionaire Paul Elliott Singer, who leads Elliott, had also pushed for Samsung to list shares on a US exchange, but the company said that it would consider a Nasdaq listing only after it makes decision on the holding company.Bloomberg