Samsung Pressed to Cancel Preferred Shares by Hedge Fund

Seoul-based hedge fund Align Partners has formally requested Samsung Electronics Co. to repurchase and cancel its outstanding preferred shares, marking a significant shareholder initiative aimed at enhancing the company's valuation. This proposal, submitted on January 17, 2024, represents one of the first instances of a shareholder directly advocating for the cancellation of preferred stock in South Korea. Align Partners, which holds a 0.6% stake in Samsung Electronics, argues that the current structure of preferred shares, which are not publicly traded and have historically traded at a discount to common shares, depresses the overall market capitalization of the company. The fund estimates that cancelling these shares could unlock approximately ₩13 trillion (approximately $9.7 billion USD) in shareholder value. Samsung Electronics currently has 1.1 billion preferred shares outstanding, which were issued in 2013. These shares typically offer a dividend premium over common shares but lack voting rights. Align Partners contends that the low liquidity and trading volume of these preferred shares, coupled with their discount to common shares, create an inefficient capital structure. The hedge fund's proposal includes a plan to repurchase these shares using a portion of Samsung's substantial cash reserves, which stood at ₩125 trillion (approximately $93 billion USD) as of the third quarter of 2023. Align Partners has outlined a multi-year strategy for the repurchase, suggesting it could be executed over a period of three years. The fund also proposes that Samsung Electronics should increase its dividend payout ratio to 50% of free cash flow and implement a share buyback program for common shares, further demonstrating a commitment to returning capital to shareholders. The company's board of directors is expected to review the proposal. Samsung Electronics has historically been hesitant to cancel preferred shares, often citing the need to maintain a stable dividend payout for these shareholders. However, the direct and public nature of Align Partners' request, backed by a detailed valuation analysis, puts increased pressure on the company to address shareholder concerns regarding its capital structure and valuation. The outcome of this proposal could set a precedent for how South Korean conglomerates manage their preferred stock and respond to activist investor demands. Align Partners has stated that if Samsung Electronics does not adequately address its proposals, it may consider further actions to advocate for shareholder interests. The hedge fund's engagement with Samsung Electronics highlights a growing trend of institutional investors actively seeking to influence corporate governance and financial strategies in South Korea, particularly concerning the optimization of shareholder value. The specific details of the preferred shares, including their dividend rates and redemption terms, are crucial to understanding the financial implications of their cancellation. The company's response will be closely watched by the broader investment community.