Dalton: "Samsung Electronics Should Cancel More Preferred Shares... Also Consider Share Consolidation"

Preferred shares trade at a 27% discount... Same amount can buy back 1.37 times as many preferred shares as common shares
Overseas examples include BHP, Carnival and Alphabet... "Consolidating share classes should also be considered"

U.S.-based asset manager Dalton Investments has publicly urged Samsung Electronics to pursue share buybacks and cancellations focused on preferred shares. Its argument is that Samsung Electronics’ preferred shares trade at a discount of about 27% to its common shares, allowing the company to buy and cancel more shares for the same amount of money, and that the resulting increase in per-share value would benefit holders of both common and preferred shares.

In a statement sent to Samsung Electronics’ board and management on Oct. 15 local time, Dalton Investments said, “When preferred shares trade at a discount to common shares, focusing buybacks and cancellations on preferred shares benefits all shareholders.” Dalton Investments is a U.S.-based asset manager that makes long-term value investments, primarily in Asian markets, and has held Samsung Electronics common and preferred shares for more than 10 years.

Yonhap News Agency

The statement drew attention because it came ahead of Samsung Electronics’ announcement of specific measures for shareholder returns later this month. Palliser Capital had also previously issued a statement. In May, Dalton Investments held an in-person meeting with Samsung Electronics’ management and discussed the allocation of preferred shares in the company’s share buybacks.

Dalton Investments first pointed out that Samsung Electronics’ preferred shares trade at a price about 27% below that of its common shares. This means that, with the same amount of funds, the company could acquire about 1.37 times as many shares by buying preferred shares as it could by buying common shares. Buying and canceling more discounted shares would reduce the number of shares outstanding and increase the corporate value and ownership stake represented by each remaining share. Dalton Investments emphasized that this effect would benefit holders of common shares as well as holders of preferred shares.

Addressing concerns that not buying common shares could weigh on their share price in the short term by eliminating additional buying demand, Dalton Investments argued that the impact of supply and demand should be distinguished from changes in corporate value. It said that while the effect of supply and demand on share prices depends on various factors and is generally temporary, the reduction in shares outstanding resulting from share buybacks and cancellations, as well as increases in earnings per share (EPS) and shareholders’ ownership stakes, are lasting economic benefits. It said that when setting priorities for share buybacks and cancellations, long-term benefits to shareholder value should take precedence over short-term share price movements.

Dalton Investments also cited examples of overseas companies in response to concerns that buybacks and cancellations focused on preferred shares could be unfair to different groups of shareholders. It emphasized that when multiple classes of shares represent rights to the economic value of the same company but trade at different prices, selectively buying back the relatively undervalued shares can help enhance shareholder value.

As a leading example, Dalton Investments cited BHP. BHP previously had two classes of shares listed separately in Australia and the United Kingdom. When its UK-listed shares traded at an average discount of 8% to 9% to its Australian-listed shares in 2006 and 2007, BHP bought back $6 billion worth of its UK-listed shares—more than the $4.8 billion worth of Australian-listed shares it bought back. Dalton Investments said that BHP determined the scale of its buybacks based on relative prices, even though fewer UK-listed shares were outstanding at the time. In 2022, BHP consolidated the listing structures of the two share classes.

Dalton Investments also cited Carnival, which had shares listed separately in the United States and the United Kingdom. Carnival operated a “share swap program” under which it sold higher-priced shares and bought the same number of lower-priced shares, generating a net increase in capital of $7 million in 2015 and $1 million in 2016. Carnival also consolidated its listing structure into a single listing in 2026.

Alphabet was also mentioned. Its shares are divided into Class A and Class C shares, depending on whether they carry voting rights. In 2021, Alphabet revised its share repurchase program to allow it to buy back both classes of shares and to take into account their relative trading prices and volumes, economic costs, and market conditions. Dalton Investments said this showed that factoring in price differences among share classes when making share buyback decisions is a rational approach that takes shareholder value into account.

Dalton Investments argued in particular that Samsung Electronics could set a precedent for easing the “Korea discount” as it addresses the discount on its preferred shares. It said the persistent discount applied to preferred shares in South Korea is also linked to the structural undervaluation of the Korean stock market. It further recommended considering a plan to consolidate the common and preferred shares into a single class.

“When multiple classes of shares trade at different prices, opportunities arise to create shareholder value. We strongly urge Samsung Electronics to actively take advantage of these opportunities,” Dalton Investments said, adding, “We are confident that Samsung Electronics will continue to set an example and lead change.”

This content was produced with the assistance of AI translation services.