Samsung Buyback May Narrow Korea’s Preferred Share Discount
Samsung Electronics Co.’s anticipated equity buyback is elevating investor expectations that the Korean giant will acquire non-voting preferred shares, thereby reducing a significant discount and establishing a benchmark for others. Over 100 South Korean firms, such as Hyundai Motor Co. and LG Chem Ltd., have opted to issue preferred shares, thereby raising capital while preserving the voting power of their founding families. They offer a modest dividend premium compared to common stock, yet they are traded at an average discount of 45%, which is indicative of a significant misallocation of capital, as noted by Sachin Mistry, a portfolio manager at Palliser Capital in London. Market observers anticipate that Samsung will focus on its discounted preferred stock during any buyback, as this strategy would be cost-effective and also allow the company to navigate a regulation that might compel its affiliates to reduce their holdings.
The low prices serve as a critical point of concern for investors as Seoul progresses with governance reform aimed at eradicating the ‘Korea discount,’ a persistent undervaluation in the equity market. “There is a momentum for the discount gap to narrow,” said Han Sangkyoon. “Preferred shares are at an excessive discount,” he said. Last month, Samsung Electronics announced its intention to allocate up to 110 trillion won to distribute its artificial intelligence gains, marking one of the largest shareholder-return initiatives globally. While it didn’t specify how much will be used for buybacks, there exists a 26% disparity between the preferred stock and common equity. That spread is at its widest in more than a decade, according to data, even after narrowing from 37% in recent months due to buyback expectations. Hyundai Motor announced in August a stock buyback program that encompasses preferred shares.
Hyundai’s common shares are presently trading at a premium of over 50% compared to its preferred shares. “Companies can save their future dividend payout if they buy back and cancel preferred shares,” said Kang Dong-oh. “The more companies buy back preferred shares, the more all shareholders benefit.” Additionally, according to Korean legislation, financial affiliates of Samsung are restricted from owning more than 10% of voting common stock. A substantial repurchase of the ordinary equity would elevate affiliates associated with the founding family beyond that threshold, necessitating divestitures. By repurchasing preferred shares, it circumvents any disruption to this ownership structure, while simultaneously enhancing valuations.
The 10% rule “may limit the number of common shares that the company can repurchase, so they may repurchase more preferred shares,” said Molly Pieroni. “That could trigger the discount narrowing.” Through buybacks, Samsung would also enhance per-share value, contributing to the reduction of the Korea Discount. Yacktman Asset Management and other investors anticipate that Samsung’s buyback initiatives could catalyse a wider re-rating of preferred shares throughout corporate Korea. “We see the preferred stock discount as a symptom of the Korean Discount where restricted market access is impacting ‘normal’ price discovery,” Pieroni of Yacktman said. “As Korea continues to open its market to international investors, we expect that the discount will narrow.”
