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Company: Samsung C&T (028260.KS)
Business: Samsung C&T Corp is a Korea-based company engaged in the trading of industrial goods. The Company operates its business through a group of segments. These include engineering and construction, trade and investment, and fashion and resorts. The company’s shares are not traded in the United States
Market value: $15.35 billion ($94.71 per share)
Activist: Palliser Capital
Percentage ownership: 0.62%
Average cost: n/a
Comment from activists: Palliser Capital is a global multi-strategy fund with a focus on Asia and Europe. Palliser was founded in 2021 by James Smith, who previously headed Elliott Investment Management’s Hong Kong office. Palliser applies a value-based investment philosophy to a broad range of opportunities across the capital structure where complexity or distress results in undervaluation, which can be monetized through an elaborate process or proprietary catalyst. Nearly the entire senior investment team has extensive activist experience at Elliott. The firm has experience investing in both Europe and Asia, and its activist investment in Keisei demonstrated the patience, conviction and diplomacy of a top activist.
What happens
On December 6, Palliser Capital announced that it had acquired a 0.62% stake in Samsung C&T (SCT).
Behind the scenes
Palliser believes that Samsung C&T (“SCT”) is significantly undervalued by the market due to suboptimal capital allocation, historical corporate governance issues and a complex corporate structure. The investor suggested short- and long-term actions that could be taken to create $25 billion in shareholder value. At first glance, creating $25 billion in shareholder value in a $15 billion company seems ridiculous. However, if one delves into Palliser’s thesis, one might see that the company is conservatively underestimating the value that can be created here. SCT is a large South Korean industrial conglomerate controlled by the Lee family through several subsidiaries. SCT has a publicly traded market capitalization of approximately $15 billion. Its main assets consist of five listed subsidiaries and one operating business. The after-tax value of SCT’s interest in these five listed subsidiaries is: Samsung Electronics ($13.9 billion), Samsung Biologics ($13.4 billion), Samsung SDS ($1.7 billion), Samsung Life ($1.6 billion) and Samsung Engineering ($300 million). . That’s a total of $30.9 billion in easily determinable and realizable value for a roughly $15 billion company. This doesn’t even include the operating business, which has sales of $30 billion and earnings before interest, taxes, depreciation and amortization of $1.55 billion. Using a 5.5x EBITDA multiple, Palliser values this business at $8.4 billion. With net cash of $1.1 billion, that corresponds to a company valuation of $40.4 billion.
Why is this company trading at a 63% discount? For three reasons. First, capital allocation policies and practices have left shareholders and others with little confidence that much of this value will accrue to them. SCT has annual cash flow of about $1.5 billion, and only about 25% of that is returned to shareholders through a dividend and up to 60% is used for capital expenditures. Samsung is an iconic and structurally important Korean company that should invest and grow. Palliser doesn’t debate this. The company wants a more transparent and disciplined investment plan that uses the backdrop of share buyback returns as a benchmark and provides a fair return to shareholders. SCT also has other options to generate cash for capital expenditures and shareholder returns, such as raising debt (the company has $1.1 billion in net cash) to reduce its cost of capital and potentially some of its disparate and non-synergistic businesses to sell the operating company that makes up the company.
Second, SCT’s corporate governance policies do not give shareholders confidence that the board is working for them. In South Korea, boards of directors have a duty to the company, not to shareholders. Without a change in the articles of association, the company can take other measures to give shareholders more confidence. The current board consists of five independent directors and four executive directors. While Korean companies of this size are required to have 50% independent directors, “independent” is not defined. This means board independence may not be what investors would expect in the US. Additionally, SCT’s independent directors lack real C-suite experience, relevant industry experience and proven expertise in portfolio management and capital allocation. Therefore, refreshing the board with experienced independent directors would be a good start. The board is also offset. Three of the four directors are co-CEOs of the company; These people report to the board and make up a third of its composition. If SCT appointed a CEO to whom the other department heads would report, it would simplify decision making. In addition, more transparent communication with the market and coordination of management’s interests with shareholders would also make a big difference.
Third, the complex ownership structure among each other, or “chaebols,” as they are called in South Korea, results in a steep discount to value. SCT was formed through a series of M&A transactions aimed more at keeping the family in control than at efficiency. These chaebols have negatively affected the valuation of these companies. For this reason, South Korean chaebols have shifted to dual-tier holding structures over the past 20 years. Samsung is one of two major companies in South Korea that still has the chaebol structure. This chaebol structural discount permeates the entire organizational structure. Even with the chaebol structure, Palliser estimates a valuation gap of $25 million. The move to a holding structure would increase the value of all SCT subsidiaries. Compared to the share price today, this would widen this valuation gap even further.
The undervaluation here is beyond doubt. The key question is what Palliser or anyone else can do to close this valuation gap. All Palliser is currently doing is bringing these issues into public debate to pressure management to make shareholder-friendly changes. The company does not threaten confrontational action. Palliser has a history of working with management to effect change. That’s a good thing here, because winning a proxy fight is extremely rare in South Korea. This has happened before, but not by a non-local activist in an iconic company with a family owning 30% of the common stock. However, the trend is on Palliser’s side as South Korea becomes more shareholder-friendly every year. And there’s also a good reason why the Lee family might support changes that increase shareholder value. Lee family patriarch and former Samsung chairman Lee Kun-hee was South Korea’s richest person at the time of his death on October 25, 2020. Lee’s death triggered the largest inheritance tax bill in South Korean history, exceeding $10 billion. South Korea’s 50% inheritance tax rate is the second highest in the world after Japan. His heirs have five years to pay the inheritance tax, and they could certainly use higher-value shares as margin or return more capital to shareholders.
Palliser is not alone in his thinking. Shareholder City of London Investment Management Company has made two proposals for the 2024 annual meeting: a dividend of approximately $3.42 per common share and a $380 million repurchase program running through the end of 2024. In South Korea, shareholder proposals are binding if approved by a majority of shareholders, but they are rarely approved. At the very least, enough votes could pressure management to do something. A good start would be to cancel the 13% of outstanding shares held as treasury shares, which are among the outstanding shares in South Korea and which management has already promised to be canceled within five years. This would immediately boost earnings per share by 14.4%.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.