About 15 trillion won ($13 billion) worth of shares in Samsung Electronics Co. are poised to flood South Korea’s stock market, as lawmakers and regulators seek to restrict the control that chaebol families exert over their business empires.
Samsung Life Insurance Co. is facing pressure to sell its stock in the electronics maker, as President Moon Jae-in’s party prepares to push a bill through parliament that bans insurance firms from having a stake in an affiliate of more than 3% of its assets.
The measure would change accounting rules so that such holdings would be valued at their current price instead of their acquisition cost, putting the stake over the regulatory threshold.
The insurer is a key component in Lee Kun-hee’s family’s control over Samsung Electronics, and a smaller shareholding would weaken its influence over the Suwon-based company. A stock sale is one of the biggest clouds hanging over the manufacturer, which reports preliminary quarterly earnings Friday. The new bill, sluggish smartphone sales and an investigation in China over allegations of collusion in chip sales have fueled a 9% decline in the share price this year, after gaining in the last two years.
“It’s Samsung Life’s Achilles’ heel that’s weighing on Samsung Electronics shares,” said Jeong Dae-ro, an analyst at Mirae Asset Daewoo Co. “There’s no Samsung affiliate that can afford to take over so many Electronics shares from Samsung Life.”
Samsung shares were down less than 1% at midday Thursday. A representative for Samsung Electronics referred the issue to Samsung Life, which said it’s conducting a “comprehensive review to soundly manage its finances in line with changes in the environment.”
Samsung’s preliminary report is projected to show that sales fell slightly the quarter ended June. A conference call will be held after the full figures are released in about three weeks.
Samsung Life built its stake before 1980 for less than 600 billion won, and its holdings are now worth about 23 trillion won, making it the largest stakeholder after the National Pension Service. Lee holds 20.8% of the insurer, while Samsung C&T Corp., in which his son Jay Y. Lee is the largest stakeholder, holds 19.3% of Samsung Life. The heir only has a 0.65% stake in Samsung Electronics.
While C&T is considered a likely buyer for the stake in Samsung Electronics, it would have to convince other shareholders to agree to spending the money, risking a potential backlash.
This isn’t the first time that regulations have weighed on Samsung Electronics shares. Most recently, the stock fell 3.5% on May 30 when Samsung Life and Samsung Fire & Marine Insurance Co. said they would sell 27 million shares in Samsung Electronics to avoid breaking a separate chaebol regulation.
In fact, the Financial Services Commission led by Choi Jong-ku has the authority to tweak the rules without parliamentary approval but has so far left the ball in Samsung’s court. In April, he urged Samsung Life to “voluntarily and gradually” come up with plans to sell its stake in Samsung Electronics before the bill is passed.
The bill to change pricing rules for stakeholdings has faced opposition in South Korea’s legislature since its submission in 2014 because of the potential impact on markets, but it now has a fresh chance of passage after Moon’s party won a landslide victory in local elections last month.
Lee Jong-kul, a five-term ruling party lawmaker, says Samsung Life needs to be untangled from Samsung Electronics to protect its insured members and make it harder for chaebol families to use financial units to control other businesses. The party is looking to use its 130 seats in parliament to create a 180-seat coalition, which would let it fast-track legislation and effectively provide a “green light” for reform bills such as his, Lee said.
“Many companies, including Samsung, have relied on expedient methods to run themselves and taking unfair market competition for granted,” Lee said in response to written questions. “To remain globally competitive, our companies need to be run more transparently and according to international standards.”
— Read US Is Putting China in a Stronger Bargaining Position: Evan Greenberg, on ThinkAdvisor.