Last week Samsung decided to sell shares in Samsung General Chemicals and Samsung Techwin for $1.72 billion dollars USD (all figures in USD). The deal was the first time that Samsung sold affiliates since 1997 and is indicative as to the challenges it has faced in the last few years in terms of profitability and expansion. This deal is mainly to get rid of unprofitable businesses, make it easier for the heirs to the Samsung throne to divide the shares amongst each other, and to help Hanwha expand into a global superpower.

Transaction Drivers

The sale of Samsung’s stakes in four chemical and defence firms for $1.72 billion to Hanwha Group makes the latter company the unrivalled leader in Korea’s defence and chemical industry, by adding new companies to their portfolio that boost their sales and make way for new products in different geographies. Previously its business was focused on ammunition production and precision guided weapons, while the acquisition would give Hanwha the chance to expand into artillery and engines as well as communications, radar systems and aerospace industry. Hanwha, if the deal with Samsung Techwin and Samsung Thales will close, would have 2.5995 trillion won of sales and 262.7 billion won of operating profit in the defence industry (based on the 2013 data). Samsung Group is facing a period of transition and reorganisation after the hospitalisation of the chairman Lee Kun-hee, due to a heart attack in May. In particular, his children are trying to divvy up the conglomerate, withdrawing from petrochemical and defence industries, where Samsung has failed to make profits in recent years. As Chung Sun-Sup (CEO of the research firm Chaebul.com) said: “Samsung under Chairman Lee Kun-hee’s leadership expanded into a wide range of businesses, but it looks like (heir apparent) Jay Y. Lee is now looking to move in the other direction and make the group more compact”. In fact, although the group did not elaborate the reason for the sale, the heirs seem to want the company to be focused mainly on electronics, construction and finance and this arrangement is very convenient for them, since they also have to deal with an estimated 6 trillion won inheritance tax bill.

Transaction Terms & Structure

Samsung sold 57.6% of Samsung General Chemicals (to Hanwha Chemical & Energy for about $1 billion) and 32.4% of Samsung Techwin (for $765 million) to the Hanwha Group that will retain management rights in both companies. Samsung Techwin comes with Samsung Thales as it owned 50% of the French-Korean electronic weapons maker (which was a joint venture between Samsung Petrochemical Total/Samsung Total, Thales, and the French Total SA), Techwin also owned a 22% stake of Samsung General Chemicals, SGC owned half of Samsung Total so Hanwha will also manage that company along with 10% of Korean Aerospace Industries (KAI) of which Techwin was also a proprietor. Investment bankers and corporate lawyers had to deal with the complex shareholder structure of the subsidiaries when deciding the terms of the deal and which company kept what. To summarize: Hanwha acquires Samsung Techwin, Samsung General Chemicals, Samsung Thales, Samsung Total/Samsung Petrochemical Total, and KAI. Samsung Total is expected to allow Hanwha to restart its oil refining business after a number of years, and due to a sliding share price (because of the company’s loss of the Samsung brand name) Samsung Electronics agreed to buy back $2 billion shares of the sold companies to stop the falling share prices. The board of directors has so far approved the deal and says it will be finalized as early as January. Industry overview Samsung was founded in 1939 and it has since become one of the world’s leading companies in the electronics market with 206 offices in 68 countries globally, operating in over 100 countries across the world. Samsung has grown to become one of the most successful electronic companies with a special focus on digital appliances, memory, semiconductors, and system integration. Data shows that Samsung closed the 2011 year achieving 220 billion euro in revenues, and employing more than 344 thousand people all over the world. It is of note that Samsung also has its roots business areas outside of electronics: in fact, this corporation is comprised of many heterogeneous companies that are setting new life standards from electronics including (up to now) petrochemicals and defense systems. Samsung’s business is separated into Set Business and Component Business:

1. The Set Business is mainly comprised of Mobile Phones, Personal Computers and MP3 Players. The Mobile Phones section of this portfolio is one of the most successful ones especially over the last few years. The TV Business is another key driver in this portfolio. LED TVs and LCD TVs have maintained top positions in the market, even though they have been substituted by the new rising 3D technology. The two remaining sections are the Printer and Camera businesses.
2. The second portfolio is Component Business, which is a top player in memory and LCD markets and in product and technology development. This portfolio is subdivided into semiconductors and LCD. The Semiconductor Business is divided even further into Samsung Memory Division, System LSI Division, and Storage Systems Division. The System LSI Division manufactures logic and analog integrated circuit devices. The Storage Systems Division is a leader in producing high-performance hard disks for notebook and desktop PCs and other similar products.

Hanwha Corporation, founded in 1952, is now becoming one of the Korean leading companies in the defense and chemical industry. Its name is a contraction of the words “Korean” and “gunpowder” and this fact anticipates its core operations. It is made of two major business units: the Explosives Division, which makes commercial explosives, technologically advanced defense industry products and aerospace products, and the Trade Division, which, by using the company’s vast global network, deals with a variety of products, including petroleum, metals, and other goods. Hanwha Corporation entered the defense industry early on and it has invested in research and development in a variety of areas ranging from munitions to advanced technology precision guided weapons. Hanwha Corporation has also entered into the auto-parts and aerospace industries. Hanwha, which recorded sales of 1.0184 trillion won ($924.22 million) in 2013 in the defense sector, is sure to become the largest weapon manufacturer in Korea thanks to the recent contract for the acquisition from Samsung of the Techwin, at a price of 963 billion won, and Thales, for 617.6 billion won. The Samsung Group is selling Samsung Techwin, Samsung Thales, Samsung Fine Chemicals, and Samsung Total to the Hanwha Group to withdraw from the petrochemical and defense industries, where it has eventually failed to make profits, and following its new strategy to concentrate its main resources on electronics and construction. In 2013, the top three players in the weapon’s industry were Korea Aerospace Industries (1.345 trillion won), LIG (1.208 trillion won) and Samsung Techwin. Moreover, the takeover is fundamental to complete the vertical integration of Hanwha’s guided weapon systems, as its competitiveness in the warhead, driving, and propulsion fields will be combined with that of Samsung Techwin. Hanwha forecasts to work more aggressively on robotics systems and exploiting the resources of Samsung Techwin. The 10 percent KAI shares of Samsung Techwin go to Hanwha as well, which means it could be engaged in aircraft manufacturing in the long term. For this reason, it was planning to better utilize Samsung Techwin’s capabilities in fighter jets, helicopter engines, and robot manufacturing. Hanwha is also about to become number one in the petrochemical industry. The sales could go up to approximately 18 trillion won ($16.3 billion), slightly higher than those of LG Chem stuck at 7.5452 trillion won ($15.9161 billion). Samsung General Chemicals have produced purified terephthalic acid for polyester, and Samsung Total has produced polyethylene, polypropylene, styrene monomer, par xylene and other chemicals. At the same time, Hanwha’s ethylene production volume would go up to 2.91 million tons, the ninth highest worldwide. Samsung Total is expected to allow Hanwha to restart its oil refining business after 17 years.

To contact the authors of this story:

Davide Magni            davide.magni@studbocconi.it

Andres Ibarguen       andres.ibarguen@studbocconi.it