Samsung`s Cheil Industries to merge with affiliate Samsung C&T

Samsung`s Cheil Industries to merge with affiliate Samsung C&T. May. 27, 2015 07:24. drake007@donga.com¡E.

Cheil Industries and Samsung C&T, the two companies currently holding key positions in Samsung Group`s holding structure, are merging, in a sign that Vice Chairman Lee Jae-yong will take greater control of the group. Earlier this month, Lee took over as chairman of the Samsung Life Public Welfare Foundation and the Samsung Foundation of Culture, two charitable foundations, the first official positions passed from his father.

Cheil Industries and Samsung C&T held a meeting with board of directors Tuesday and announced the merger. Under the merger agreement, Cheil Industries will acquire Samsung C&T by offering 0.35 new Cheil share for each C&T share. Though Cheil is acquiring C&T, the combined company will take the Samsung C&T name in deference to the company`s roots in trading. Samsung traces its origins to the establishment of Samsung C&T in 1938. The merger is expected to be completed on September 1, pending approval at shareholder meetings of the two companies in July. This will create a construction and service company with asset of 39 trillion won (43 U.S. billion dollars) and annual revenue of 34 trillion won (31 billion dollars) based on last year`s results.

Samsung Group`s governance structure will be simplified after the merger. Currently, Samsung`s circular shareholding structure has the following relationship: Cheil Industries→Samsung Life Insurance→Samsung Electronics→Samsung SDI→Samsung C&T→Samsung Electronics. This will be simplified to Samsung C&T→Samsung Life Insurance→Samsung Electronics structure.

Lee Jae-yong currently holds a 23.3 percent stake in Cheil Industries but following the merger he will become the biggest shareholder in the new company, with an estimated 16.5 percent stake. The merger will allow him take control of both Samsung Electronics and Samsung Life Insurance through Samsung C&T. Hotel Shilla CEO Lee Bu-jin and Cheil Industries CEO Lee Seo-hyun, who each has 7.8 percent stake in Cheil, will possess 5.5 percent stake each in the merged company. The Lee family has a combined 30.4 percent stake including 2.9 percent held by Samsung Electronics Chairman Lee Kun-hee.

A source from the business circle said, "The merger is a start of an actual management succession."

Samsung`s complex business structure also becomes clear after the merger. The group will be reorganized into three axes of electronics led by Samsung Electronics, financial service led by Samsung Life Insurance and construction, trade, fashion, resort and food and beverage businesses led by Samsung C&T`s construction and service units.

Both Cheil and C&T shares surged in the main KOSPI market Tuesday. Cheil soared 24,500 won (22.15 dollars) from the previous trading day to close at 188,000 won (167 dollars). C&T rose 8,200 won (7.4 dollars) to 63,500 won (57.4 dollars). The closing prices are 20.1 percent and 10.9 percent higher than stock purchase right price of 156,493 won (141,46 dollars) and 57,234 won (51.73 dollars), respectively.