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Samsung rejects holding company as profit tops estimates

LiveMint logoLiveMint 27-04-2017 Sam Kim

Seoul: Samsung Electronics Co. Ltd won’t convert into a holding company, resisting a push by activist investor Paul Elliott Singer, after posting quarterly profit that topped analyst estimates on smartphones and component sales.

Adopting such a structure isn’t desirable for Samsung’s competitiveness, the Suwon, South Korea-based company said Thursday. The company reported first quarter net income of 7.49 trillion won ($6.7 billion), compared with the 6.77 trillion won expected by analysts, and announced its first ever quarterly dividend of 7,000 won.

Samsung’s rejection of Elliott’s proposal comes even as vice chairman and de facto chief Jay Y. Lee remains in detention as he stands trial in an influence-peddling scandal. The shares jumped to a record on the news, shrugging off the court case and last year’s Note 7 smartphone recall, as the company boosts returns to investors and earnings surge on demand for high-end screens and chips for mobile devices.

“The plans announced today to increase returns for shareholders trumped the announcement not to turn into a holding company,” said Lee Jae-yun, an analyst at Yuanta Securities Co. “Many shareholders to a degree had also expected the holding company bid would not become a reality.”

The stock surged as much as 4% to 2.226 million won, the highest ever on an intraday basis, before trading 2.7% higher as of 10:02am in Seoul.

Elliott called on Samsung to restructure in October, releasing a 10-page letter that detailed his push for a holding company, more independent directors, a Nasdaq listing and the payment of 30 trillion won of dividends.

While Samsung has returned more cash to investors, it cited an increasingly uncertain “legal and regulatory environment” for its decision not to pursue a holding company. Calls to reduce the power of families behind South Korea’s conglomerates are growing ahead of the 9 May presidential election and parliament has been reviewing proposals that could make it harder for Lee to control the crown jewel of the nation’s biggest company.

Samsung said it plans to cancel 40 trillion won of treasury shares in two stages. Samsung has about 12.9% of its own common stock in its treasury holdings. At today’s prices, its treasury holdings are valued at about $35 billion.

Lee, grandson of the Samsung founder, is fighting charges that he paid bribes to a confidante of the country’s former president Park Geun-hye to win government support of a merger of affiliates that tightened his grip. Both Lee and Park have denied the allegations.

The Lee family has maintained control for decades with a complicated web of cross-holdings that has generally protected it from outside influence. In November Samsung said it would consider ways to streamline its corporate governance amid a push by Singer for changes.

“It will prompt shareholders to more aggressively ask Samsung to increase returns,” said Claire Kim, an analyst at Daishin Securities Co. “Given Samsung has been performing well, it has the wherewithal to meet such demands.”

Operating profit for the quarter was 9.9 trillion won the company said, confirming preliminary numbers released earlier this month.

The mobile unit had operating profit of 2.07 trillion won. Samsung unveiled the new Galaxy S8 in March with first deliveries of its most expensive handset starting this month. Pre-orders of the device, and the larger S8+, beat the record of the previous model in the high-end Galaxy range.

After being overtaken by Apple Inc. in the fourth quarter of 2016 when Samsung pulled its Note 7 from shelves because the phones tended to catch fire, the Korean company reclaimed the global top spot with 26% of shipments in the three months ended March, according to market researcher TrendForce.

While Apple is expected to unveil a new iPhone later in 2017—the 10th anniversary of the iconic device—it’s said to be adopting a display using organic light-emitting diodes that is made by Samsung.

“For long-term investors, all this means they have an excuse to hold on to their shares for longer terms,” Won Jong-jun, chief executive officer at Lime Asset Management, said. “Greater profit for Samsung means the company could afford greater dividends for shareholders than have been announced already.”

Operating income from Samsung’s chips unit was 6.31 trillion won while the display business had earnings of 1.3 trillion won. The consumer electronics unit, which includes TVs and appliances, had profit of 380 billion won. Bloomberg

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