This is election year in South Korea ? a presidential poll in December follows the parliamentary one in April ? and, as the economy stutters, politicians are promising ?economic democratisation? that would weaken the dominance of the chaebol in the country?s business arena.
Samsung ? the largest chaebol, accounting for about a fifth of South Korea?s exports ? is coming under particular scrutiny. And according to analysts at Citigroup, a new proposal from lawmakers would affect Samsung disproportionately strongly, perhaps forcing it to shift as much as $15bn between the various parts of the sprawling group.
Here?s why. The Lee family is only listed as holding 4.7 per cent of Samsung Electronics, but Citi reckons it effectively controls 17.6 per cent of voting rights through stakes held by other Samsung Group subsidiaries ? notably Samsung Life Insurance, which owns 7.5 per cent of the company.
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That is part of a mind-boggling web that extends across much of the group (see diagram left). This sort of set-up is common among the chaebol ? but Samsung differs from Hyundai, for example, in that its financial subsidiaries hold big stakes in non-financial ones.
That?s why Samsung could be forgiven for feeling targeted by the latest proposal from lawmakers in the ruling Saenuri party. They are proposing to remove voting rights from financial companies that hold stakes in non-financial affiliates.? That would reduce the intra-group share of voting rights in Samsung Electronics to less than 10 per cent, as votes were stripped from Samsung Life and other of Samsung?s financial businesses.
The Lee family would therefore have to choose between yielding influence to other shareholders of Samsung Electronics (as well as those of Samsung C&T, the trading and construction company, and the Hotel Shilla group) ? or to retain that clout by buying the stakes in question or transferring them to non-financial subsidiaries.
At current market valuations, this would cost at least $15bn, Citi?s team estimates. Selling the stakes in their affiliates could be a boon for Samsung Life and other financial subsidiaries such as Samsung Card and Samsung Fire & Marine ? they might be able to put the proceeds to better use by actively investing them in their own operations.
But this would result in a hefty bill somewhere else ? perhaps at Samsung Everland, an unlisted theme park operator controlled by the Lee family, or indeed at Samsung Electronics, which had $12.7bn in cash and cash equivalents at the end of last year.
Samsung declined to comment.
NOTE: Hyundai would escape lightly under the scenario outlined above ? but according to Hoon Lee at Korea Investment and Securities Co, the founding Chung family could face a much stiffer bill than Samsung if ?circular shareholding? structures were banned altogether, without the restriction on financial companies? stakes in non-financial affiliates. Read his research here.
Related reading:
Samsung v Apple: no more playing nice, beyondbrics
S Korea corporates: hard times away from the podium, beyondbrics
Succession not just family affair in Asia, FT
Lex in depth: Samsung, FT
Source: http://blogs.ft.com/beyond-brics/2012/08/28/samsung-legal-threat-to-chaebols/
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