Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Event-Driven

This morning's Maeil has an article (<a href="http://news.mk.co.kr/newsRead.php?year=2015&amp;no=570516" target="_blank">original</a>, <a href="http://news.mk.co.kr/newsRead.php?year=2015&amp;no=572463" target="_blank">updated</a>) suggesting Elliot's accounting firm has come out with a FAR different fair value ratio for the shares. The Maeil called it 'irrational' (or an alternate translation is "embarrassment") as it was almost five times the proposed ratio. Whereas the current ratio is 0.35 Cheil shares for every share in C&amp;T, the "fair value" found is reportedly 1.6 Cheil shares for every share in C&amp;T. That's a really big difference - but indeed not too far in log terms from the ratio suggested by our <a href="http://www.smartkarma.com/insights/samsung-c-t-completely-the-wrong-price-trillions-being-left-on-the-table" target="_blank">"Completely The Wrong Price"</a> piece (while our measure did not include a deferred tax liability from marking the securities holdings at their new "fair" prices, a fair value corporate valuation might do just that).  Importantly, it was reported in the Maeil which is Korea's largest daily business newspaper. IMMODEST ACCOUNTING?  The RIDICULOUS difference between a 1:0.35 ratio and a 1:1.6 ratio suggests the directors of C&amp;T either have no idea of the relative fair values of the respective entities (we know Cheil has the advantage so I am not prepared to say they are not cognisant of the value they are getting - indeed that is the whole point for Cheil), or the directors of C&amp;T were conducting immodest accounting of the two companies' respective 'situations'. The other alternatives are that C&amp;T directors are hiding something terrible, or that the accountants Elliot hired are off their rocker, implying we are too. I prefer to avoid accusing C&amp;T directors of outright fraud, and I think the independent accounting speaks for itself.A "fair" ratio and NAV of 100-110k won/share for C&amp;T is, I believe, designed to a) scupper the existing deal, and b) create a "fair value" target for a court decision of fair value according to Article 374(2) Paragraph 5 of the Korean Commerce Act. For an activist in this particular situation, the really cool aspect of this transaction is that Cheil really, really want to get this one done. As suggested in the <a href="http://www.smartkarma.com/insights/samsung-group-who-holds-what-b6a93db6-e0b4-4e15-b7a5-e01364b0ef72" target="_blank">Samsung: Who Holds What?</a> piece, other than this deal, there are very few other potential deals which get Cheil and the Lee family what they want. Unless you think the Lees will walk away from C&amp;T just because they were defeated by an unruly upstart foreign fund, you have to expect that if they lose this battle they will seek to re-engage somehow. A MODEST PROPOSAL: There are a number of ways for the Lees to re-engage to get Elliot and other would-be objectors out of C&amp;T shares at a level appropriate for them, and to re-set a merger which would be MUCH more likely to get done. Below, I present one possible scenario which could be seen by all (or at least most) parties as "fair" and "reasonable" and would get Elliot and others out of their C&amp;T shares, allowing for a new Cheil-C&amp;T merger proposal at a slightly revised ratio to go forward. One of the the main issues with a heavily revised ratio is that the Lees would be overly diluted in Cheil, but this potential solution gets around that obstacle. More below the fold.CONCLUSIONS:<ul><li>We have Immodest Accounting causing a big kerfuffle. </li><li>We can offer A Modeft Propofal to make the problems go away.</li><li>And we get a Forrest Gump quote in there.</li></ul>

This morning's Maeil has an article (original, updated) suggesting Elliot's accounting firm has come out with a FAR different fair value ratio for the shares. The Maeil called it 'irrational' (or an alternate translation is "embarrassment") as it was almost five times the proposed ratio. Whereas the current ratio is 0.35 Cheil shares for every share in C&amp;T, the "fair value" found is reportedly 1.6 Cheil shares for every share in C&amp;T. That's a really big difference - but indeed not too far in log terms from the ratio suggested by our "Completely The Wrong Price" piece (while our measure did not include a deferred tax liability from marking the securities holdings at their new "fair" prices, a fair value corporate valuation might do just that).  Importantly, it was reported in the Maeil which is Korea's largest daily business newspaper. IMMODEST ACCOUNTING?  The RIDICULOUS difference between a 1:0.35 ratio and a 1:1.6 ratio suggests the directors of C&amp;T either have no idea of the relative fair values of the respective entities (we know Cheil has the advantage so I am not prepared to say they are not cognisant of the value they are getting - indeed that is the whole point for Cheil), or the directors of C&amp;T were conducting immodest accounting of the two companies' respective 'situations'. The other alternatives are that C&amp;T directors are hiding something terrible, or that the accountants Elliot hired are off their rocker, implying we are too. I prefer to avoid accusing C&amp;T directors of outright fraud, and I think the independent accounting speaks for itself.A "fair" ratio and NAV of 100-110k won/share for C&amp;T is, I believe, designed to a) scupper the existing deal, and b) create a "fair value" target for a court decision of fair value according to Article 374(2) Paragraph 5 of the Korean Commerce Act. For an activist in this particular situation, the really cool aspect of this transaction is that Cheil really, really want to get this one done. As suggested in the Samsung: Who Holds What? piece, other than this deal, there are very few other potential deals which get Cheil and the Lee family what they want. Unless you think the Lees will walk away from C&amp;T just because they were defeated by an unruly upstart foreign fund, you have to expect that if they lose this battle they will seek to re-engage somehow. A MODEST PROPOSAL: There are a number of ways for the Lees to re-engage to get Elliot and other would-be objectors out of C&amp;T shares at a level appropriate for them, and to re-set a merger which would be MUCH more likely to get done. Below, I present one possible scenario which could be seen by all (or at least most) parties as "fair" and "reasonable" and would get Elliot and others out of their C&amp;T shares, allowing for a new Cheil-C&amp;T merger proposal at a slightly revised ratio to go forward. One of the the main issues with a heavily revised ratio is that the Lees would be overly diluted in Cheil, but this potential solution gets around that obstacle. More below the fold.CONCLUSIONS:We have Immodest Accounting causing a big kerfuffle. We can offer A Modeft Propofal to make the problems go away.And we get a Forrest Gump quote in there.

Samsung Group - Immodest Accounting and a Modest Proposal

Since Cheil Industries (028260 KS) and Samsung C&amp;T (000830 KS) announced their merger in an effort to increase Lee family control of Samsung Electronics shares (and shares in other group companies) on a post-inheritance-tax pro-forma basis, the Smartkarma universe has been regularly updating readers regarding the situation.A RECAP:  <a href="http://www.smartkarma.com/insight_providers/5" target="_blank">Arzish</a> started things off with <a href="http://www.smartkarma.com/insights/samsung-c-t-too-big-to-cheil" target="_blank">Samsung C&amp;T: Too Big to Cheil</a> just after deal announcement. After Elliot announced its increased position, I followed up with <a href="http://www.smartkarma.com/insights/samsung-c-t-completely-the-wrong-price-trillions-being-left-on-the-table" target="_blank">"Completely the Wrong Price: Trillions being left on the table"</a> then a <a href="http://www.smartkarma.com/insights/samsung-c-t-quicknote-30-40-foreign-institutional-investors-ask-for-fairer-swap-rate" target="_blank">QuickNote</a> suggesting Dutch national pension manager APG was leading a group of foreign shareholders to ask C&amp;T for a better merger ratio, and a <a href="http://www.smartkarma.com/insights/samsung-c-t-quicknote-volume-patterns-and-ownership-changes-since-deal-announcement" target="_blank">piece</a> on volume changes and ownership since the deal was announced. <a href="http://www.smartkarma.com/insight_providers/16" target="_blank">Crispin Francis</a> added a <a href="http://www.smartkarma.com/insights/shareholder-activism-around-samsung-c-t-legal-limitations" target="_blank">piece</a> on the legal limits of shareholder activism. Another <a href="http://www.smartkarma.com/insights/helmets-on-c-t-sells-treasury-shares-to-pensions-increase-stake" target="_blank">piece</a> was added when C&amp;T announced it had sold its Treasury Shares to KCC Corp (a large shareholder of Cheil Industries and a friendly party) and Crispin followed up with a <a href="http://www.smartkarma.com/insights/treasury-shares-differences-and-similarities-to-precedent-cases" target="_blank">piece</a> on legal precedents to injunctions filed against treasury share sales in proxy battle situations with a 'hostile' party. The discussion section of several pieces have been of additional interest I think. THIS NOTE adds a table - as comprehensive as possible - of cross holdings among Lee family members, the Samsung foundations, and major Samsung group companies (listed and unlisted). It can be used to estimate where the potential interest lies in future mergers in order to obtain greater family control.More below the fold.

Since Cheil Industries (028260 KS) and Samsung C&amp;T (000830 KS) announced their merger in an effort to increase Lee family control of Samsung Electronics shares (and shares in other group companies) on a post-inheritance-tax pro-forma basis, the Smartkarma universe has been regularly updating readers regarding the situation.A RECAP:  Arzish started things off with Samsung C&amp;T: Too Big to Cheil just after deal announcement. After Elliot announced its increased position, I followed up with "Completely the Wrong Price: Trillions being left on the table" then a QuickNote suggesting Dutch national pension manager APG was leading a group of foreign shareholders to ask C&amp;T for a better merger ratio, and a piece on volume changes and ownership since the deal was announced. Crispin Francis added a piece on the legal limits of shareholder activism. Another piece was added when C&amp;T announced it had sold its Treasury Shares to KCC Corp (a large shareholder of Cheil Industries and a friendly party) and Crispin followed up with a piece on legal precedents to injunctions filed against treasury share sales in proxy battle situations with a 'hostile' party. The discussion section of several pieces have been of additional interest I think. THIS NOTE adds a table - as comprehensive as possible - of cross holdings among Lee family members, the Samsung foundations, and major Samsung group companies (listed and unlisted). It can be used to estimate where the potential interest lies in future mergers in order to obtain greater family control.More below the fold.

South Korea

Samsung Heavy Industries Co., Ltd. manufactures crude oil tankers, container vessels, bulk carriers, cruisers, and passenger ferries.  The Company also produces steel and bridge structures, and material handling equipment.  In addition, Samsung Heavy Industries provides civil engineering, architectural, and plant construction services.

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Samsung Heavy Industries (010140 KS)

Samsung Group - Immodest Accounting and a Modest Proposal

This morning's Maeil has an article (original, updated) suggesting Elliot's accounting firm has come out with a FAR different fair value ratio for...

Travis Lundy

SAMSUNG GROUP: Who Holds What?

Since Cheil Industries (028260 KS) and Samsung C&T (000830 KS) announced their merger in an effort to increase Lee family control of Samsung...

Travis Lundy

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