By Se Young Lee and Joyce Lee
SEOUL (Reuters) - An activist U.S. hedge fund on Thursday threw a spanner in the works of Samsung Group's restructuring by opposing a merger that would allow the controlling Lee family to consolidate their holdings ahead of a leadership transition.
In a rare instance of investor activism in South Korea, hedge fund Elliott revealed it had built a major stake in construction firm Samsung C&T Corp <000830.KS> and said it opposed Cheil Industries Inc's <028260.KS> $8 billion takeover offer because it was too low. Both are Samsung Group affiliates.
The move is the first significant challenge to a merger that investors and analysts believe is crucial to a smooth transfer of power at South Korea's biggest family-run conglomerate, after patriarch Lee Kun-hee, 73, fell ill a year ago.
It could also galvanise opposition to the deal from other investors amid growing complaints that South Korea's top conglomerates put their founding families' interests before those of other shareholders.
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"Elliott believes that Cheil Industries' proposed takeover of Samsung C&T significantly undervalues Samsung C&T and that the terms are neither fair to nor in the best interests of Samsung C&T's shareholders," the fund, now Samsung C&T's third-largest shareholder with a 7.1 percent stake, said.
The fate of the deal may ultimately depend on Korea's National Pension Service (NPS), Samsung C&T's top shareholder with about a 10 percent stake. NPS had yet to decide on whether to accept the offer, a spokesman said.
The merger of Cheil and Samsung C&T would consolidate stakes both companies hold in key Samsung Group affiliates such as smartphone giant Samsung Electronics Co Ltd <005930.KS> under a single entity controlled by heir apparent Jay Y. Lee, 46, and his two sisters, tightening their grip on the business empire.
Elliott had owned 4.95 percent of Samsung C&T before acquiring an additional 2.17 percent for about 216 billion won ($194.08 million) on Wednesday, an official at South Korea's Financial Supervisory Service said. The combined stake was worth 773 billion won at Thursday's closing price of 69,500 won per share.
Some other investors believe Cheil has made a low offer. The book value of Samsung C&T's various equity holdings in publicly traded firms, including a 4.1 percent stake in Samsung Electronics, was about 13 trillion won at end-March.
"We hope this will be a wake-up call to Samsung," said Park Yoo-kyung, a director for Samsung C&T shareholder APG Asset Management. "Korea has finally started to see investor activism like other countries."
Shares of Samsung C&T and Cheil Industries ended up 10.3 percent and 5 percent, respectively, amid speculation that Cheil may have to offer better terms. Samsung C&T said it would reach out to various investors and find ways to boost shareholder value.
Cheil may also scrap the offer if it has to buy back more than 1.5 trillion won of Samsung C&T shares from shareholders who elect to cash out instead of taking new Cheil stock.
(Additional reporting by Hyunjoo Jin; Editing by Stephen Coates and Miral Fahmy)
