Korea’s chaebol reform a rare bonus for bankers

By:
Chris Wright
Published on:

With deal volumes weak across most of Asia, South Korea’s latest round of chaebol reform – some by choice, some by necessity – is welcome news for M&A bankers. There is plenty to do, but none of it simple, and not always lucrative.

Samsung Seoul Korea-R-600

 

IN ADDITION

South Korea’s chaebols are a throwback. Tangled and powerful, they date from the country’s efforts to bolster industrial growth in the aftermath of the civil war. Under tight family control and swept up on a wave of exporting success that has lasted on and off for half a century, they are everywhere. And they are also out-of-date, stifling growth and entrepreneurship, where once they drove it.

The idea of reforming these huge conglomerates is nothing new. LG, controlled by the Koo family, was the first of the biggest chaebol to start dismantling its labyrinthine circular shareholdings and move to a holding company structure in the early years of this century; it was followed by SK a few years later. Now there is a renewed round of activity driven by two different causes. 

At the top end, Samsung – the biggest and most powerful of the chaebol – has set about selling non-core assets and simplifying company structures in a move that has attracted not only international investors but international activists. Below the top tier, a second wave of chaebol have run into trouble, unable to service their debts in a fragile world economy that penalizes exporters, and are restructuring by necessity, selling and listing businesses to meet the bills.

"Below the top chaebol, you have companies that aren’t making as much profit as they used to," says ChunKee Lee, chief executive for Korea at Credit Suisse. "They’re not earning enough, they’re being reviewed by their creditor banks and they are being encouraged to sell their non-core assets."

Separately, there is growing pressure from government to reform chaebol for the benefit of the nation and, perhaps, the stirrings of more shareholder activism.

"As the companies get bigger, the wealth disparity is growing too, leading to more resentment," says one leading banker in Seoul. "So now there’s more pressure for the government to force proper restructurings."

It is, on the face of it, all good news for international investment banks, which tend to win the advisory mandates, while domestic houses dominate cheap fundraising.

"There are many opportunities for restructuring M&A in Korea," says Lee. There is a wealth of work to go around, but with a caveat: is anyone making any money out of it?

Restructuring Samsung

In South Korean banking the big prize is Samsung. Despite recent problems with exploding phones, it is the country’s biggest household name, its outstanding blue chip and its most recognized international brand. 

Samsung Electronics alone typically represents about 23% of the Kospi Index, Samsung C&T ranks fourth, Samsung Life makes the top 10 and numerous others – Samsung SDI, Samsung Card, Samsung SDS, Samsung Heavy Industries, Samsung Electro-Mechanics – the top 50. 

In October, Samsung BioLogics covered an entire planned $2 billion IPO on the first day of bookbuilding. There is nothing else remotely like it in the country.

It is an interesting time at Samsung. Patriarch second-generation chairman Lee Kun-hee was incapacitated by a heart attack in 2004. His son, Lee Jae-yong – the founder’s grandson – has been gaining influence ever since. 

Lee junior, known to all as Jay Y, is a different type of leader than either of the previous generations and representative of a new wave of younger leaders coming to the fore in the chaebol. He spent five years at Harvard and brought ideas back with him about how to run a company. He has been restructuring Samsung ever since he took effective power (Korean culture dictates that he will not formally become chairman while his father is still alive). 

Already Samsung has largely sold out of the defence and chemical industries.

samsung structure-700
A page from Elliot Advisors’ presentation shows just how complex Samsung’s ownership structure really is

"That was a good business, making money," says Dongsuk Choi, co-head of investment banking Korea at Goldman Sachs. "But they decided defence and chemicals were no longer core, so they sold. Samsung wants to focus on core expertise, and where it initiates, others [chaebol] follow." 

Samsung’s future appearance has made further headlines ever since the arrival of activist hedge fund Elliott Management in the wings. Elliott first turned up last year to oppose a merger between Samsung C&T, a construction and trading group that is also a big shareholder in Samsung Electronics, and Cheil Industries, yet another Samsung affiliate that is active in textiles, fashion and chemicals. Elliott argued then that the merger would unfairly benefit the Lee family at the expense of small shareholders and came close to winning a proxy fight.

In October, it made public a letter and presentation with some clear suggestions about what Samsung should do. Among other things, it suggested that the ownership stakes Samsung Electronics owns in all the other Samsung businesses should be put in a new holding company. The remaining Samsung Electronics would then be listed in New York and Seoul. Elliott is also agitating for a $27 billion dividend, independent directors and various other governance initiatives. One only has to look at the 31-page presentation and in particular its attempt to express the existing Samsung structure in a single chart, to see how complicated it is – chaebol cross-holdings at their baffling best. 

The letter, signed by Blake Capital and Potter Capital, vehicles Elliott has used to amass a modest stake in Samsung Electronics, says the shares trade at a valuation discount of up to 70% relative to peers.

"Now is the time for real shareholder value, corporate governance and transparency improvements, which we believe will help Samsung Electronics achieve an equity market valuation that properly reflects its first-class portfolio of businesses," the letter says, which is a bit more polite than Elliott’s usual tone. 

The pitch even suggests the Lee family maintain control of the group, a vital concession: no matter how much juggling goes on at the chaebol, they will only reorganize if the shareholdings are in the right place to keep the same people in charge.

"The merger of Samsung C&T with Cheil had nothing to do with shareholder value," says one banker. "It’s to get one step closer to having more control of Samsung Electronics."