Paul Singer (Trades, Portfolio)’s Elliott Management is seeking change at Samsung Electronics Co. (XKRX:005930, Financial)(SSNLF, Financial). The American hedge fund is urging the company to reshape and simplify its ownership structure.
In a letter to Samsung’s board of governors, Elliott argued the company had “failed for years to deliver proper shareholder value” and challenged it to split the company into two parts and provide a special dividend payout. In addition, the firm encouraged Samsung to list its resulting company on a U.S. exchange such as the Nasdaq.
According to Elliott, the separation of Samsung into an operating company and a holding company would provide both organizational and tax benefits. It would also simplify the complex family holdings and treasury stock that hurt Samsung’s valuation.
In the letter, Elliott claimed Samsung is undervalued by as much as 70% due to its “unnecessarily complex” structure, “bottom-tier” shareholder returns and “subpar” governance.
The dual-listing of the holding company in New York and Seoul would also boost trading volumes and allow more exposure to international investors, which would help Samsung trade higher.
Last year, the hedge fund lost a shareholder proxy fight with Samsung that contested the proposed merger of two of Samsung’s units. Elliott claimed the merger would unfairly benefit Samsung’s founding Lee family while hurting smaller shareholders.
Samsung has been having struggles of its own. Shortly after the release of the Galaxy Note7 smartphone in August, there were reports of the devices overheating and catching fire, sparking a massive recall of the device.
Similarly, the company’s line of washing machines has also been having issues. In September, reports emerged citing issues with Samsung’s top-loading washing machines. When washing heavy loads, some of the machines would vibrate causing the tub to become loose, subsequently destroying the machine.
In addition, the company’s chairman, Lee Kun-Hee, has been in declining health since suffering a heart attack in 2014. His son, Lee Jay Yong, has been helping run the company since then and was nominated to the board last month.
Samsung was founded by the Lee family of South Korea in 1969. It is a major manufacturer of electronic components such as lithium-ion batteries, semiconductors, chips, flash memory and hard drives. The company has expanded into consumer electronics and, as of 2011, is the world’s largest manufacturer of mobile phones and smartphones. It has been the world’s largest manufacturer of televisions since 2006. The company is headquartered in Suwon, South Korea.
Samsung has a market cap of $226.9 billion with an enterprise value of $162.3 billion. It has a price-earnings (P/E) ratio of 14.7 with a forward P/E of 2.4. It has a price-book (P/B) ratio of 2.4 and a price-sales (P/S) ratio of 1.4.
GuruFocus ranked Samsung’s financial strength 8 of 10. The high Piotroski F-Score and Altman Z-Score indicate the company is in healthy financial standing. Its cash-debt ratio of 6.3 is well above the industry median of 1.5.
GuruFocus ranked the company’s profitability and growth 6 of 10. Samsung’s operating margin is 14.6%, and its net margin is 10.7%. Its return on equity (ROE) of 8.7% ranks higher than 63% of other companies in the global consumer electronics industry. Its return on assets (ROA) of 6.8% ranks higher than 76% of other companies in that industry. Similarly, its return on capital (ROC) of 22.5% ranks higher than 73% of its competitors.
Samsung reported a dividend of 86 cents for the second quarter and has a dividend yield of 1.12%.
The DCF Calculator gives the stock a fair value of $1,026.9; it was trading at $1,600 on Thursday.
Among the gurus invested in Samsung, David Herro (Trades, Portfolio) is the largest shareholder with 0.23% of outstanding shares, which is 1.8% of his total assets managed. Others involved in the company are Charles de Vaulx (Trades, Portfolio), Bernard Horn (Trades, Portfolio), IVA International Fund (Trades, Portfolio), Causeway International Value (Trades, Portfolio), Matthews Pacific Tiger Fund (Trades, Portfolio) and Value Partners (Trades, Portfolio).
Singer and his firm have no direct position in the company; however, entities controlled by the firm own about 0.62% of Samsung. International investors own nearly 60% of Samsung.
The proposed restructure would need approval from two-thirds of the company’s shareholders.
Elliott Management was behind the recent sale of Cabela’s (CAB, Financial) to privately held Bass Pro Shops for $5.5 billion.
Disclosure: I do not own stock in any companies mentioned in the article.
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