(Reuters) - Samsung Heavy Industries will absorb Samsung Engineering for about $2.5 billion, the latest step in a restructuring at South Korea's largest conglomerate that has accelerated since the controlling Lee family's patriarch was hospitalized in May.
Investors are closely watching how control of the group will be transferred to heir apparent Jay Y. Lee and his two sisters. The planned initial public offerings of Cheil Industries Inc - formerly called Samsung Everland - and Samsung SDS Co Ltd are seen as key elements in the succession process.
However, Monday's deal, which caught investors by surprise and sent shares in both companies surging, appears mainly to be part of Samsung's ongoing consolidation of overlapping business areas. No Lee family members directly hold shares in either of the two firms, which do not in turn hold shares in crown jewel Samsung Electronics Co Ltd.
"Samsung Group is making adjustments to its various businesses, looking for either vertical integrations or moving pieces around for other purposes," said Chung Sun-sup, chief executive of corporate research firm Chaebul.com.
"The key purpose is to lay the groundwork that will make it easy for the Lee heirs to divide the inherited assets or separate out their own turfs within the group after they take control," he said.
Lee Kun-hee, the 72-year-old patriarch of the group's controlling family, has been in hospital since suffering a heart attack, adding urgency to the family's plans to keep its grip on a sprawling empire it controls through a complex series of interlocking shareholdings.
Under terms announced Monday, Samsung Heavy Industries Co Ltd, the world's second-largest shipbuilder with a market capitalization of about $6.6 billion, will issue around 94 million new shares to Samsung Engineering Co Ltd shareholders at 26,972 won per share, valuing the deal at around 2.5 trillion won ($2.47 billion). Samsung Heavy shares closed at 27,250 won on Friday.
Shares in Samsung Engineering, valued at about $2.8 billion, closed up 12.5 percent while Samsung Heavy shares rose more than 6 percent on Monday, as investors appeared to bet that the merger would create efficiencies for both over the longer-term.
Samsung Heavy, which like other Korean shipbuilders can build but cannot design complex offshore structures, could cut costs by gaining engineering talent, while Samsung Engineering could benefit from the shipbuilder's heft to expand into bigger projects.
MORE RESTRUCTURING TO COME
The two merging companies had combined sales of about 25 trillion won last year and aimed to grow that to 40 trillion won by 2020, Samsung Heavy said.
Samsung Engineering, which builds petrochemical and energy facilities, reported a 1.03 trillion won operating loss in 2013 as it booked provisions for loss-making projects in regions and areas where it has less experience, such as a chlor-alkali plant in the United States, as well as low-margin projects it won between 2009 and 2012.
Samsung Heavy reported an operating loss of 362.5 billion won in the first quarter of this year after setting aside around 500 billion won for losses expected on offshore projects, but turned a profit in the second quarter and is seen to be financially healthier than Samsung Engineering.
Observers said further streamlining of Samsung may involve builder Samsung C&T Corp, which is considered a key piece of the Lee family's control of the group as it owns shares in sister companies including Samsung Electronics and Cheil Industries.
"There could be another restructuring move down the road. The group could first complete this merger and then decide to transfer the construction business of the combined entity to Samsung C&T," Daewoo Securities analyst Sung Ki-jong said.
Samsung Group [SAGR.UL] split off its fashion-and-electronics materials unit Cheil Industries earlier this year, merging the materials business with battery maker Samsung SDI Co Ltd and the fashion business with amusement park operator Samsung Everland. Samsung Everland later changed its name to Cheil Industries.
"A potential scenario could be that Samsung C&T takes the onshore construction-related business from the merged entity once the IPOs are completed," said Park Jung-hoon, fund manager at HDC Asset Management.
A Samsung Group spokesman declined comment on how Monday's deal fit into the group's overall restructuring process. A Samsung Heavy spokesman and a Samsung Engineering spokeswoman both declined further comment.