Game of succession

Samsung's $8-billion restructuring offer looks cheeky

The Lee family is making an opportunistic play to consolidate its control over Samsung Group. Cheil Industries, the newly listed de facto holding company of the clan that runs the South Korean smartphone-to-insurance empire, has offered to buy affiliate Samsung C&T for around 8.9 trillion won ($8.1 billion) in an all-share deal with almost no premium. The move looks central to the family's succession planning, a key issue given the ill-health of patriarch Lee Kun-hee. That means investors in C&T can afford to hold out for more.

The widely anticipated offer appears to be an attempt to tighten the family's grip on Samsung Electronics, the crown jewel of the empire. The family directly own just 4.7 per cent of the $204 billion smartphone maker. C&T owns a further 4 per cent alongside its operations as a construction and trading company. While the Lee family and other Samsung affiliates have around 50 per cent of Cheil Industries, which operates in fashion and theme parks, they only own a small part of C&T. Beefing up the value of their shares in Cheil could also help Lee's children pay a tax bill that could amount to $6 billion if they inherit their father's shareholdings.

Cheil is offering 0.35 new shares for each share in C&T, equivalent to a premium of just 3.5 per cent based on the closing prices on May 22. That's close to the lowest ratio between the two shares since Cheil debuted in December, according to Eikon. It also looks particularly opportunistic given that C&T was already trading at a discount of almost 19 per cent to the value of its parts as calculated in April by CLSA. Cheil trades at an inflated 106 times forward earnings.

Shareholders in C&T can afford to hold out for more for two main reasons. Firstly, the deal appears to be a key step in the most logical way for the family to restructure the empire. Second, even if the family decide they can achieve their ultimate aims without C&T, the company's stake in Samsung Electronics itself is currently worth as much as the company's pre-bid market capitalisation. That should be enough to embolden C&T shareholders to ask the Lees for more.