What’s In It For Corning And Samsung In The Samsung Corning Precision Deal?

by Trefis Team
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    Quick Take
  • Corning will buy Samsung’s stake in Samsung Corning Precision Metals.
  • Samsung will gain 7.4% stake in Corning. Corning independently will decide how to use SCP facilities to broaden product offering and increase the customer base.
  • 10-year LCD display supply agreement ensures stable supply for Samsung and revenue stream for Corning.

Corning (NYSE:GLW) recently announced that it will buy out Samsung’s 43% stake in Samsung Corning Precision Materials (SCP), in exchange for  $1.9 billion worth of new Corning convertible preferred shares. Additionally, Samsung will make an investment of $400 million in convertible preferred shares, which would give Samsung a 7.4% stake in Corning based on its current share count [1] . The shares are convertible at $20 per share after seven years, or can be forced for conversion if the share price rises above $35. SCP manufactures LCD substrates that are used in TVs, laptops, monitors, mobile phones and cameras.

Benefits for Corning

Currently, SCP supplies only in South Korea where it has a highly concentrated customer base comprising  two LCD panel makers that accounted for 92% of the sales in the last two years. But after Corning acquires a 100% stake in SCP and merges it with its Display Technologies business, it will be able to utilize SCP’s manufacturing facilities to produce any type of glass substrates  to supply to customers around the world.  This allows the company to increase the product offering, dilute the customer concentration and reduce dependency and risk. The facility will also provide ready capacity to address new developments like using Gorilla Glass as markerboards or in automotive applications. In turn, this may help Corning gain an upper hand over competitor Asahi.

See our complete analysis of Corning here

The transaction also enhances Corning’s ability to act independently since Samsung and other minority stake holders will not have any board seats, access or observation rights. This also ensures that Corning’s customers, many of which are competitors of Samsung, do not view this deal as unfavorable to them. Corning supplies display and protective glass to smartphone and tablet manufacturers like Apple and HTC, and notebook manufacturers like Lenovo and HP.

Corning has signed a 10-year LCD display glass agreement with Samsung that will ensure a steady demand for LCD glass. Currently, Corning gets only 50% of equity earnings from SCP which amounted to $474 million for nine months ended September 2013. Gaining 100% ownership of SCP could result in an increase in annual sales by $2 billion and will add about $350 million in annual earnings for Corning.  Corning shall also gain access to $1.2 billion of cash in SCP’s balance sheet [2] . In addition, Corning will gain access to SCP’s fusion-based manufacturing assets that will help save expansion costs to increase production of LCD glass substrates and other specialty glass.

Benefits for Samsung

With this deal, not only does Samsung become the largest share holder of Corning, but also ensures a grip on its supply chain. The LCD display supply agreement benefits Samsung by assuring supply of LCDs. Another plus for Samsung would be that it will gain from sales of competitors’ products, since Corning supplies Apple with Gorilla glass for its iPhones and iPads. Samsung will also be able to leverage Corning’s research and development in glass technology, to help its own endeavors with flexible displays.

However, before Samsung and Corning can realize the benefits of the deal, they have to resolve issues with current employees of SCP. Employees of Samsung Corning Precision Materials have demanded compensation for the probability of not being associated with the Samsung brand name in the future. SCP has plans to offer 50 million won as compensation to employees who choose to continue serving Corning after the transactions for the SCP deal are completed by first quarter of 2014. But the employees are demanding 500 million as compensation. SCP has recently announced that it will accept applications from employees willing to work with other Samsung units.

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Notes:
  1. Corning and Samsung Strengthen Strategic Collaborations, October 22 2013, www.corning.com []
  2. Corning and Samsung Strengthen Strategic Collaborations, October 22 2013, www.corning.com []
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