Palliser’s Samsung buyback bet puts a hat on a hat

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By Hudson Lockett
HONG KONG, Oct 27 (Reuters Breakingviews) - In comedy writing, “putting a hat on a hat” can describe needlessly complicating a straightforward joke. Palliser Capital has done much the same in its push for Samsung Electronics 005930.KS to repurchase second-class shares on the cheap.
The underlying logic is sound. The UK-based activist wants Samsung, which will report its earnings on Thursday, to repurchase some 132 trillion won ($100 billion) in non-voting preferred shares. These were originally issued decades ago by the South Korean maker of semiconductors and mobile handsets to raise funds without diluting existing shareholders’ voting power, and account for 12% of shares outstanding. But they trade at a heavy 23% discount to ordinary shares, in part because they offer negligible dividend advantage.
Palliser’s call coincides with intense pressure on Samsung to step up returns for ordinary shareholders following record artificial intelligence-powered profits. The company has already announced a record return policy of up to 110 trillion won for the current fiscal year, with 30 trillion won dedicated to third-quarter cash dividends for all shareholders. Using the entire remainder to snap up and cancel cheaper preferred shares, the activist argues, can deliver more bang for each buck while shrinking the number of total shares and boosting dividend payments.
Specifically, Palliser wants Samsung to commit to a preferred share discount target – as the chipmaker did in 2015 – and reckons the company can eliminate the gap completely and eventually re-acquire the entire class of stock by 2028. Before that, the activist estimates preferred shareholders could see a share price bump of 84%, compared to 37% for ordinary shareholders.
It’s a fair point, but the optics are awful: foreign investors accounted for 73% of preferred shareholders at the end of June, compared to 46% of common shares. That makes full-throated support from the administration of President Lee Jae Myung less certain, even with local fund Life Asset Management making the same demand. Lee wants conglomerates to pony up more returns but his constituents are South Korean voters, not foreign funds.
Palliser adds another needless twist by calling on Samsung to issue American Depositary Receipts and use proceeds exclusively for preferred stock buybacks. In July, rival SK Hynix 000660.KS raised $26.5 billion from its own US debut, with those shares now trading at a more than 40% premium to their Seoul-listed counterparts. Yet with Samsung tipped by Visible Alpha to end the year with cash and cash equivalents of roughly $147 billion, the firm has little need to tap American investors and dilute existing shareholders at home.
Palliser can be commended for holding Samsung’s feet to the fire, but risks overplaying its hand in a market that’s only just begun warming up to activist investors. Some version of Hyundai Motor's 005380.KS most recent buyback, which targeted both preferred stock and ordinary shares, might be less ambitious — but it's also less likely to land like a bad joke among local investors.
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CONTEXT NEWS
At the Sohn San Francisco Investment Conference on October 13, Palliser Capital's Chief Investment Officer James Smith called on Samsung Electronics to issue American Depositary Receipts to help pay for the repurchase of $100 billion worth of non-voting preferred shares. The South Korean chipmaker’s preferred shares trade at a 23% discount to its ordinary stock.
Foreign investors accounted for 73% of preferred shareholders in Samsung Electronics at the end of June, compared to 46% of common shares, according to the firm.

(Editing by Robyn Mak; Production by Eileen Soreng and Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))