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Samsung torn over Moon's push to break up chaebol

South Korea's top conglomerate pressed to spin off insurer key to family control

The South Korean government has pressured Samsung to adopt a holding company structure to produce a win for President Moon Jae-in's efforts to reform the country's conglomerates.   © AP

SEOUL -- Samsung Group faces a difficult decision on its life insurance arm as South Korea's government presses family-owned conglomerates to spin off financial units, part of President Moon Jae-in's effort to weaken their power.

Samsung Life Insurance's major stake in core company Samsung Electronics makes it a cornerstone of the group's structure, and leaves the prospect of selling to an outsider seem unappetizing. But the other option of having another group company buy out the insurer's stake would require massive funding.

The pressure on the country's top chaebol, or family-run business empires, increased after peer Lotte Group said on Nov. 27 it would sell two financial units, Lotte Card and Lotte Insurance, to further its shift to a holding company structure.

Civic groups and overseas investors have denounced the chaebol for consolidating power in founding families through complex and opaque cross-holding structures. In recent years, some of the conglomerates have sought to ease the criticism by adopting a more straightforward ownership structure with the founders as top shareholders. LG and SK Holdings have switched to holding company structures.

South Korean law forbids nonfinancial holding companies from owning stakes in financial companies, a measure intended to keep holding companies from misappropriating funds. Insurers are also barred from holding more than the equivalent of 3% of their total assets in shares of affiliated companies.

The country's Fair Trade Commission and progressive lawmakers have urged Samsung, the biggest of the chaebol, to adopt a holding company structure, or at least sever the capital relationship between Samsung Life and Samsung Electronics. Moon, who has promised sweeping reforms of the conglomerates and appointed a man nicknamed the "chaebol sniper" to head the antitrust watchdog, appears intent on delivering a big result on his campaign vow.

But for Samsung, the hurdles are high. Samsung Life, the country's top life insurer, is the electronics company's second-largest shareholder with an 8.2% stake. Samsung Electronics Vice Chairman Lee Jae-yong, the group's heir apparent, and his father, ailing Chairman Lee Kun-hee, hold a combined stake of just 4.5% in the electronics company. Selling off the insurer would unavoidably weaken their grip, as would any sale of the electronics maker's shares on their own.

Failure to resolve this dilemma led Samsung to pass on adopting a holding company structure when it reviewed the possibility in 2016 and 2017. The group "has no option but to maintain the status quo," said one securities analyst.

This is not the only problem for Samsung. The group has lately faced increased criticism amid suspicions of accounting fraud at biotech unit Samsung BioLogics connected to the younger Lee's inheritance of the group.

Some financial market watchers speculate that the group is considering a compromise where a separate Samsung company would buy the insurer's shares in Samsung Electronics. But based on the electronics company's share price, purchasing the more than 8% stake would require around $20 billion, making the prospects uncertain.

"The government should help come up with ways to let the chaebol reform according to their situations," said one chaebol-affiliated individual.

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