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A Singapore-based activist fund has offered to take over a Samsung affiliate, arguing its shares are undervalued, in the first big test of South Korea’s new shareholder protection rules.
Flashlight Capital Partners sent a letter to five Samsung Group units on Thursday, offering to buy their combined 20.6 per cent stake in S-1 Corporation, South Korea’s largest security services provider, for Won906.6bn ($655mn).
The offer, which would give Flashlight control over management of the company, is the first takeover bid for a Samsung affiliate by an activist investor and represents a 45 per cent premium to Wednesday’s closing price.
Sanghyun Lee, managing partner of Flashlight, said his fund was emboldened by South Korea’s new Commercial Act, which was revised in July last year to impose a legal duty on company directors to consider the interests of all shareholders.
Before the change, corporate governance advocates said boards typically prioritised the interests of the ruling families behind chaebol, the family-run conglomerates that dominate South Korea’s economy.
“The answers from the five boards will show whether the directors work for their shareholders,” said Lee.
The five boards include those of battery maker Samsung SDI, Samsung Life Insurance, Samsung Fire & Marine Insurance, brokerage Samsung Securities and credit card provider Samsung Card.
The offer follows a letter the fund sent to S-1’s board in June urging the company to improve its corporate governance and boost its share price, which has fallen by nearly a third over the past decade.
Lee said the board responded with an “incredibly hollow” response. “I was dumbfounded when they admitted the board ‘had never tried to analyse its own fair share price’.”
He noted that S-1 controlled half of South Korea’s market for security services, but its stock was trading at a “steep discount” — about four times its annual operating profit, compared with 12 times for second-ranked SK Shieldus and 10.6 times for global peers.
“S-1 is the market leader yet its smaller rival, SK Shieldus, is winning on growth, profitability and valuation,” Flashlight said in June.
“That is not a business problem — it is a governance problem,” it said, adding that every S-1 chief executive over the past 25 years had come from Samsung Group and had no professional experience in security services.
S-1 denied there were governance issues, pointing to its bench of independent directors, and said the company was “deeply committed to enhancing the share price and shareholder value”.
“With regard to the company’s fair value, we refer to the methods used by securities analysts to calculate their target prices as a way of obtaining an objective market perspective,” it said.
The current chief executive, the company said, was a “professional manager” with leadership experience at Samsung Electronics and construction arm Samsung C&T, while the head of security operations came from the sector.
It added that it had paid a dividend of Won3,200 ($2.30) a share this year and maintained a payout ratio in the 60 per cent range, well above the market average.
Flashlight said it would “keep all options open” until it heard from each of the five Samsung boards, stressing that selling their non-core holdings in S-1 would free up capital for investment in their core businesses or returns to shareholders.
Japanese security company Secom is S-1’s largest shareholder, with a 25.65 per cent stake, but has not been actively involved in the South Korean company’s management.
Flashlight, which owns less than 5 per cent of S-1, is also expected to try to buy shares from Secom later, according to people close to the matter.
