hankyoreh

With prosecutors investigating the 1-to-0.35 merger ratio equating the value of one Cheil Industries share to three Samsung C&T shares at the time of the two companies’ 2015 merger, new calculations indicate a suitable merger ratio if the two companies’ value had been assessed normally at the time would have fallen in the range of 1-to-0.7 to 1-to-1.18. The calculations suggest that Cheil Industries share values were severely inflated from their actual level. Prosecutors investigating accounting fraud by Samsung BioLogics (Samsung Bio) are now looking once again into allegations that Samsung deliberately reduced Samsung C&T share values by reducing performance numbers and selling off shares ahead of the merger.

2015 merger ratio of Cheil Industries and Samsung C&T and ratio calculated by PSPD

“When the factors used to improperly inflate Cheil Industries value are corrected for, the maximum suitable merger ratio comes out to 1-to-1.18, which is close to the 1-to-1.21 merger ratio named in 2015 by ISS, the international decision-making advisory company that advises the National Pension Service,” the group People’s Solidarity for Participatory Democracy (PSPD) said in a May 27 report on “re-estimation of the suitable Cheil Industries-Samsung C&T merger ratio.”

“The improper gains earned by Samsung Electronics Vice Chairman Lee Jae-yong as a result of this amount to 2 trillion to 3.6 trillion won [US$1.68-3.03 billion], while the losses for the National Pension Service (NPS) are estimated in the range of 330 billion to 600 billion won [US$277.66-504.7 million],” the report observed.

Headed by director Kim Gyeong-yul, the PSPD economic and financial center has consistently raised allegations concerning accounting fraud at Samsung Bio. The center’s new calculations of a suitable merger ratio were based on assessment reports for Samsung C&T (by Deloitte Anjin) and Cheil Industries (Samjong KMPG) as reported on May 23 by the Hankyoreh. To secure shareholder support for mergers, companies draft reports assessing their own value and that of the other company involved in the merger. At the time, the NPS and other shareholders agreed to an actual merger ratio of 1-to-0.35 based on the assessment reports drafted by the two major accounting firms.

But upon re-examination of the assessment reports following the recent emergence of specific details, PSPD concluded that the value of Cheil Industries was inflated by over 8 trillion won (US$6.73 billion) through hastily devised “phantom projects” (US$2.52 billion), the omission of Samsung Bio call options and other liabilities (over US$2.52 billion), and the assessment of idle Samsung Everland land for “business purposes” after its previous assessment as being non-business-related (US$1.6 billion). Conversely, it found that the business value of Samsung C&T – which far outstrips Cheil Industries in earnings scale and other areas – was improperly reduced and rated as lower than Cheil Industries. On this basis, PSPD argued, a recalculation of the two companies’ value would result in a suitable merger ratio as high as 1-to-1.18 – far above the 1-to-0.5 baseline for the NPS’ consent to the merger as Samsung C&T’s majority shareholder. The merger motion is unlikely to have passed if the merger ratios had been properly determined. The motion ended up passing in 2015 with 69.53% support (above the minimum of 66.6%); NPS, which voted in favor, possessed a 11.2% stake in Samsung C&T.

“Samsung C&T and Anjin, which should have pursued a maximally beneficial merger ratio, not only did not attempt to secure their own profits, but actually presented a merger ratio that favored Cheil Industries, causing enormous losses for Samsung C&T shareholders,” PSPD said.

“The Samsung C&T management and Lee Jae-yong should be held civilly and criminally accountable for breach of trust, and the unlawfully acquired profits should be confiscated,” the group added.

By Choi Hyun-june and Lim Jae-woo, staff reporters