Can Activist Investors Really Reshape Samsung?

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

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Hedge fund Elliott Management is pushing for structure and governance changes at Samsung Electronics (OTC:SSNLF), sending a letter to the company on Wednesday. In many ways, Samsung is an ideal target for activist investors, given its complex holding structure, corporate governance, and low capital efficiency. Excluding cash, Samsung trades at just about 7x projected 2017 earnings, marking a discount of at least 30% below its peer group. Below we take a look at some of the key value-enhancement proposals made by the activist hedge fund and gauge the odds of the proposal succeeding.
Trefis has a $1,370 price estimate for Samsung Electronics, which is roughly 15% below the current market price.

See our complete analysis for Samsung

Simplifying Ownership Structure And Improving Governance

Samsung Electronics is part of a family-run conglomerate and its ownership structure is extremely complex, with circular and cross-shareholdings involving other firms in the Samsung Group and the promoter family. To simplify this, the hedge fund wants Samsung to begin by splitting Samsung Electronics into an operating company that runs the core electronics business (Opco) and a holding company that manages the firm’s stakes in other affiliates (Holdco). (See detailed proposal) Samsung’s corporate governance also lags behind its peers, with a high ratio of executive to non-executive directors on its board, and Elliot is proposing that Samsung appoint at least three truly independent directors to the boards of its potential Opco and Holdco.

Doubling Down On Dividends

Samsung’s cash position, net of debt, remains among the highest of its peers, accounting for roughly 27% of the firm’s market cap. This is even higher than Apple’s net cash to market cap ratio. The excess cash position is dragging down the company’s shareholder returns and capital efficiency. To address this, Elliott is asking Samsung to make a one-time dividend payment of roughly 30 trillion Korean won (about $27 billion, or 15% of its current market cap) to shareholders from its cash holdings, while committing to return at least 75% of its free cash flows each year. Samsung currently returns roughly 20% of its free cash flow to shareholders, while U.S. rivals such as Apple and Qualcomm return 70% or more of their free cash flows to share holders.

NASDAQ Listing To Diversify Capital Sources And Improve Liquidity

The fund is proposing that Samsung seek a NASDAQ listing for its potential Opco. Samsung’s stock is not currently available as an ADR in the U.S. markets, and investors either need to buy it via the Korean stock market, the OTC market or from the London market as a GDR. This limits the company’s investor base, with U.S. investors potentially applying a liquidity discount on the stock. For instance, Elliott notes that an average of just $300 million worth of Samsung equity is traded per day, despite the firm’s $200 billion plus market cap. A U.S. listing would also help to improve analyst coverage of the firm’s stock.

Will Elliott Succeeded In Reshaping Samsung? 

Elliott holds just about 0.6% of Samsung Electronics’ stock, and it remains to be seen how much change the fund can bring about with such a small stake. Moreover, Elliott’s very public approach may not go over well with Samsung, which has a relatively conservative and discreet style of operating. Additionally, foreign activists have had a mixed track record of success in Asia. That said, Elliott Management came very close to winning its proxy battle to block a merger between Samsung group firms Samsung C&T and Cheil Industries last year. The fund could have a better chance of success with Samsung Electronics, as international investors hold about 54% of Samsung Electronics stock, unlike the C&T battle where a bulk of shareholders were domestic investors. Additionally, many of the value enhancement proposals are actually roughly in line with the promoter family’s broader game plan to reshape the company (related: Why Samsung Stock Is Up 30% This Year). Management has shown some interest in untangling its ownership structure and bolstering capital returns, although progress has been slow.

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