Samsung considers structural split as investor pressure builds
South Korean tech giant said it will increase dividends as it contemplates restructuring
Samsung: in October US activist hedge fund Elliott Management called for the firm to split itself into a holding vehicle for ownership purposes and an operating company, and boost shareholder returns. Photograph: Kim Hong-Ji/Reuters
South Korea’s Samsung Electronics said on Tuesday it will increase dividends and consider splitting itself, as the tech giant faces possibly the biggest structural change in its 47-year history.
The world’s top maker of smartphones, memory chips and televisions, however, said it was “absolutely neutral” about whether to proceed, and provided little detail on the potential restructuring, underwhelming investors and keeping shares flat.
“The review does not indicate the management or the board’s intention one way or another,” the company said in a statement, adding it hired external advisers for a review that is expected to take at least six months.
The move comes after US activist hedge fund Elliott Management in October called for the firm to split itself into a holding vehicle for ownership purposes and an operating company, and boost shareholder returns.
Shares in Samsung, worth $224 billion (€211.6bn), traded largely flat, rising 0.06 per cent by 5.19am GMT. A boost in 2016 payouts fell short of some investors’ expectations while uncertainty over the restructuring kept investors at bay, analysts said. “There is some disappointment that the dividend wasn’t even higher or possibly a special dividend and this is the reason for a flat share price today,” said Sat Duhra, asset manager at Henderson Global Investors.
Samsung did not directly address Elliott’s proposals on Tuesday, but the firm promised to respond by the end of November. The company pledged to return 50 per cent of free cash flow for 2016 and 2017, versus Elliott’s call for up to 75 per cent to be returned on top of a $26 billion special dividend.
Samsung also said it was not considering merging its owner vehicle with Samsung C&T Corp, Samsung Group’s de facto holding company, even if it were to move to a holding company structure, rejecting another Elliott proposal. “I don’t think Samsung said much that was surprising or beyond what investors had already had in mind,” said HDC Asset Management fund manager Park Jung-hoon.
Investors and analysts have long viewed a split for Samsung Electronics as a way for Lee family scion Jay Y Lee and his two sisters to boost their control of South Korea’s top conglomerate, the Samsung Group.
While Samsung executives did not comment on potential deal structures, investors believe the Lees and Samsung Group affiliates will exchange their operating company shares for stock in the holding firm, strengthening their grip.
Samsung Electronics would then return more capital to shareholders, investors say. Such a move would boost earnings for Samsung Group firms and the Lee heirs, who face a multi-billion dollar inheritance tax in the event that 74-year-old Samsung Group patriarch Lee Kun-hee dies. The senior Lee has been in hospital since May 2014 after having a heart attack. Investors have said that Samsung shares trade at steep discounts to global peers due to its complex ownership structure, poor corporate governance and inefficient cash management. The hope is that a major restructuring would address those concerns and boost the company’s value.
“We would be satisfied that the company, as with many other Korean corporates, is moving in the right direction in addressing decades of inefficient structures, poor governance and weak corporate behaviour towards minority shareholders,” said Duhra at Henderson.
In another nod to investors, Samsung said it would increase dividends for 2016 by 36 per cent to 28,500 won (€23) per share, and buy back and cancel additional shares in January 2017 with whatever excess free cash remains from 2016. The firm also said it needed to maintain a net cash position of between 65 trillion won and 70 trillion won, suggesting it is not likely to pay the 30 trillion won special dividend sought by Elliott.
Elliott says Samsung has the highest net cash position and lowest dividend payout ratio compared with its global peers of Qualcomm, Apple and TSMC due to its conservative cash management.