Cutting chains of circular  investment would cost at least W4.3tr for Samsung, W6.1tr for Hyundai Motor


Both ruling and opposition politicians have been critical of the practice of circular equity investment among the affiliates of large conglomerates, which allows chaebol families to control the companies despite holding a small stake.

The main opposition Democratic United Party has laid out a bill banning cross-shareholding among chaebol affiliates after a grace period of three years to get rid of the existing circular investments.

An analysis showed that business groups can break the chain of circular investment with a few trillion won, less than previous estimates by NGOs.

Chaebul.com, an institution that monitors chaebol, estimated that it would cost about 4.33 trillion won ($3.77 billion) for Samsung Group and around 6.1 trillion won for Hyundai Motor Group.

The figures are the minimum costs for buying the stakes in some of the affiliates that are parts of the ring of investment.

The calculations were made based on the closing share prices on July 2 for listed companies and the book value as of the end of last year for unlisted firms.

Within Samsung Group, Samsung Everland holds a stake in Samsung Life Insurance, which owns a stake in Samsung Electronics, which has a stake in Samsung Card, which in turn holds a stake in Samsung Everland. This allows Lee Jay-yong, the largest shareholder of Samsung Everland, to wield control over other companies.

Of the 15 cross-investments among Samsung affiliates, the stakes in at least eight firms must be sold off to put an end to the circular shareholding scheme.

The amount it would cost to buy the stakes is 4.33 trillion won ― about a third of the value of stakes in listed Samsung affiliates owned by Samsung Electronics chairman Lee Kun-hee’s family.

The estimated cost for Hyundai Motor Group ― 6.1 trillion won ― is less than two-thirds of the 10 trillion won in value of stakes in listed affiliates held by chairman Chung Mong-koo and his son, vice chairman Chung Eui-sun.

“These are affordable sums for the chaebol groups, provided that they dismantle the circular investment system in a gradual manner,” Chung Sun-seop, chief of chaebul.com, said.

Hyundai Motor Group has two main rings of cross shareholding, one of which links Hyundai Motor Co., Kia Motors Corp. and Hyundai Mobis Co. The other connects Hyundai Motor Co., Kia Motors Corp., Hyundai Steel Co. and Hyundai Mobis Co.

But if Samsung and Hyundai Motor were to get rid of the intra-group investments in order to turn Samsung Everland and Hyundai Motor Co. into holding companies, they would need 7.86 trillion won and 10.78 trillion won, respectively.

The amounts are nearly double those needed for simply severing the chain of cross-shareholding.

Turning Samsung Everland and Hyundai Motor into holding companies would allow the chaebol families to protect their management rights in a more stable manner.

Chaebul.com estimated that it would cost a total of 14.6 trillion won for six conglomerates ― Samsung, Hyundai Motor, Lotte, Hyundai Heavy Industries, Hanjin and Hanwha ― to simply break the ring of cross-shareholding, and about 27.64 trillion won to revise the investment structure to turn core firms into holding companies.

It would cost Lotte Group 2.46 trillion won to buy stakes in at least six affiliates to take down the circular investment scheme and 3.1 trillion won to make Lotte Shopping a holding company.

Severing the chain of circular investments would cost 1.56 trillion won for Hyundai Heavy Industries Group and 213 billion won for Hanjin Group. Turning Hyundai Heavy Industries Co. and Korean Air Co. into holding companies would cost them 1.82 trillion won and 354 billion won, respectively, chaebul.com said.

Chaebol’s circular investment practice came under fire as discussions about “economic democracy” intensified among politicians ahead of the presidential election.

Park Geun-hye, the ruling Saenuri Party’s presidential frontrunner, said earlier this month that there was a need to consider prohibiting fresh circular investments by chaebol.

“It is irrational that (the chaebol families) can exercise voting rights beyond their investments,” Park said as she announced her candidacy in the Dec. 19 presidential election.

The DUP’s presidential hopeful Moon Jae-in said the cross-shareholdings among chaebol affiliates including existing ones must be banned entirely.

By Kim So-hyun (sophie@heraldcorp.com)