Exclusive-Hedge fund Palliser urges changes at Samsung C&T -sources

By Svea Herbst-Bayliss

(Reuters) -Activist investor Palliser Capital is urging Samsung C&T (SCT) to spend its cash better, improve governance and communications and simplify its corporate structure to boost its share price, said three sources familiar with the matter.

The London-based hedge fund has suggested SCT consider making a number of potential changes that could lift its share price by as much as 170%, they said. SCT is the effective holding company of South Korea's largest business conglomerate Samsung Group that is controlled by its founding family.

The sources spoke on condition of anonymity because the negotiations are private.

Possible changes could include speeding up plans to cancel its treasury shares and appointing more diverse board members who have expertise in capital allocation. Palliser also suggested naming one chief executive to oversee SCT's four business units that now each have their own head, and reviewing whether some businesses could be sold or spun off and listed, they said.

Any positive adjustments to capital allocation and governance could chip away at the so-called "Korea discount" where South Korean companies like SCT often have lower valuations than global peers due to factors such as low dividend payouts, the dominance of opaque conglomerates known as chaebols and geopolitical risks involving North Korea.

SCT, which is valued at roughly $17 billion, sits at the top of Samsung Group that counts Samsung Electronics as its crown jewel. The founding family members, including the electronic giant's chair Jay Y. Lee, are the biggest shareholders, collectively controlling more than 31% of SCT.

Palliser owns a 0.62% stake in SCT.

The stock price closed down 0.17% on Wednesday.

Palliser's chief investment officer, James Smith, proposed SCT, which has construction, trading and investment, fashion and resort businesses, buy back shares and consider transitioning to a holding company structure, the sources said.

A spokesperson for SCT said that "we continuously listen to diverse opinions from shareholders and strive to raise corporate values."

For Smith, who launched Palliser two years ago after spending two decades at activist giant Elliott Investment Management, this marks a second investment in SCT. He spearheaded Elliott's failed push to stop the company's merger with Cheil Industries eight years ago, which triggered a wide-ranging corruption scandal and a ruling against South Korea in an international arbitration case in favor of Elliott.

Since the merger, SCT's shares have lagged the Korea Composite Stock Price Index (KOSPI), returning only 3% while the index has climbed 51%.

Smith has argued SCT's share price reflects a substantial discount to its listed holdings and no value to its standalone core businesses. He has said there is room to unlock up to $25 billion of value at the company, the sources said.

But he also sounded a reassuring note in meetings with company executives, telling the company that "factors driving the excessive discount are not permanent and are highly resolvable," according to documents seen by Reuters.

Another investor, City of London Investment Management Company, also expressed frustration with the company's sluggish share price and pushed for changes in a public letter last month.

Smith plans to discuss the company at the Sohn London investment conference later on Wednesday, the sources said.

At meetings with the company, including one in South Korea last month, Smith and his team have encouraged management and the board to take more proactive steps to address the value gap, the sources said.

The hedge fund has told the company it is supportive of efforts to invest in high-growth segments like eco-friendly energy and biotechnology and healthcare while reviewing the portfolio to possible remove segments with limited growth potential, the people said.

Changes at SCT, Smith has argued, would be a "win-win-win" for investors, company customers, and South Korean society at large by boosting competitiveness and creating more long-term jobs, the people said.

(Reporting by Svea Herbst-Bayliss; Additional reporting by Heekyong Yang in Seoul; Editing by Miyoung Kim, Jamie Freed and Lisa Shumaker)