Regulation spurs Everland listing
By Shaun Cochran
In November of 2010 CLSA coined the term “Chaebolution” to describe the inevitable restructuring of the two last bastions of old school power in Korea, the Samsung and Hyundai Groups.
We argued that Chaebol restructuring is an exceptionally complex process that will unfold over the next decade. We also suggested that Samsung Group presents clearer near-term catalysts than Hyundai Group with the need for Samsung Card to divest its Everland stake by April 2012.
It has long been an open question as to how the group will achieve this end. We suggested in 2010 that the group would list Everland to meet a regulatory requirement to sell down its stake. Our view has not changed and recent market action suggests an answer to this question may be had by year end.
A recent surge in Credu’s share price suggests some excitement around the possibility of back door listing for Samsung SDS. However we are more excited about the prospects of an Everland listing.
The announcement of a Samsung Life buyback on July 15 is consistent with the view Everland will list no later than 1Q12. An Everland listing could mark the beginning of a very long term process to restructure the entire group.
The specific catalyst for an Everland listing is regulation. Under Korean regulation, if a financial company acquired more than 5% of a nonfinancial affiliate after March of 1997, it must give up all voting rights and dispose of any shares above the 5 percent limit within five years after the 2007 effective date.
Samsung Card, a financial company, owning a 25.6 percent stake in nonfinancial affiliate Everland must dispose of at least 20.6 percent by April 2012.
The drivers of the broader need for group related change are the need for management succession and firmer family control to be delivered within the constraints of a regulatory environment that rightly seeks to limit the use of capital across a group to meet the needs of one set of shareholders against those of another.
Most importantly history says restructuring can deliver substantial upsides to controlling families and investors alike.
While the process and the ultimate outcome of Samsung restructuring are difficult to predict, we believe a reorganization of the group into four key industries makes sense for all parties.
An obvious composition would be to focus on the tech, industrial, service and financial sectors independently. The recent share price moves from Credu, combined with Samsung Life’s decision to buy back stock suggest now is an appropriate time to revisit the theme.
Samsung Life’s recently announced buyback has us more confident Everland will list – a foundation assumption of our Chaebolution thesis. If an intra-group transaction were planned a Life buyback would be counter-productive.
This is because it would drive up the price of Everland for an internal suitor. Now to the casual observer the question is what is the link between a Samsung Life buyback and Everland?
The answer is of course the critical group ownership and control structure. More specifically, Samsung Life accounts for roughly 60% of the Everland’s net asset value, as such, if the group were to target a successful Everland listing it would have every incentive to increase the price of Samsung Life.
The long term structure of the group that might emerge out of such a process is almost unknowable.
The complexity of the issue is enormous and plans must evolved with shifts in market conditions, regulations and the views of key decision makers that also change over time. November 2010 marked a series of management changes for the group that the market took positively regarding the potential for long term material change.
We believe that the next major milestone is the listing of Everland. If we are right we can expect a lot more activity out of the group on management priorities and structural change. We suspect we will have the answer by the end of the year.