Samsung is to merge its shipbuilding and engineering units in its latest restructuring as the South Korean conglomerate prepares to transfer power to the next generation of its founding family.
Group-wide restructuring has accelerated in recent months as the conglomerate readies for a looming leadership change with Lee Kun-hee, chairman of Samsung Electronics and de-facto leader of the broader group, remaining in hospital after suffering a severe heart attack on May 10.
Samsung Engineering will merge into Samsung Heavy Industries in a bid to enhance their offshore business, the two companies said on Monday.
Samsung Heavy, while primarily a shipbuilding company, also produces bridge structures, constructs plants and operates wind power facilities. Samsung Engineering’s business portfolio ranges from refineries and power systems to industrial facilities and clean fuel plants.
Combining means “we are now able to provide total solutions spanning both land and sea for clients including oil majors,” said Samsung Heavy.
The proposed merger, via a stock swap, will take effect in December. Samsung Heavy will issue about 94m new shares to Samsung Engineering shareholders at Won26,972 per share, valuing the deal at $2.5bn.
The merged company is aiming for sales of Won40tn ($39bn) by 2020, versus combined sales of about Won25tn last year.
Expectations of business synergies propelled the shares of both companies higher. Samsung Heavy was up more than 7 per cent on Monday afternoon in Seoul while Samsung Engineering had surged 12 per cent.
Earnings at Samsung Heavy, the world’s second-largest shipbuilder with a market capitalisation of about $6.6bn, have been hit by the industry’s protracted struggle with excess capacity and falling new orders, while Samsung Engineering has suffered hefty losses in recent years due to fierce competition and lowball bidding.
Investors are taking the view that “the long-term synergy effects are expected to upgrade the merged company’s competitiveness,” said Kang Seung-min, an analyst at NH Investment & Securities.
The merger is part of Samsung’s preparations for the transfer of control of the business empire to the next generation, analysts said.
“The group has to simplify its sprawling business structure through consolidation and spin-offs so that management of such units can be split among Mr Lee’s children in the long term,” said Chung Sun-seop, head of Chaebul.com, a website that analyses South Korea’s chaebol business groups. “We expect such group-wide restructuring to be completed by the first half of next year.”
Samsung recently merged the electronics materials unit of Cheil Industries with Samsung SDI, while Cheil’s fashion business was absorbed by Samsung Everland, the theme park operator at the heart of Samsung’s cross-shareholding structure. Samsung General Chemicals also acquired affiliate Samsung Petrochemical.
South Korean conglomerates have come under pressure to do away with their complex ownership structure. As with many chaebols, Samsung’s units are held together by a web of cross-shareholdings that give the Lee family effective control over group management despite their small direct stockholdings. The new government under President Park Geun-hye has banned new cross-shareholdings and is offering tax breaks to encourage improved governance structure.
Earlier this year, the group announced plans for the initial public offerings of Samsung Everland, now renamed Cheil Industries, and Samsung SDS, Samsung’s IT services unit, which analysts reckon is also aimed at helping Mr Lee’s children fund any inheritance tax bills and increase their stakes in major Samsung units.
– Copyright The Financial Times Limited 2014
