SeAH Holdings released a comprehensive stock exchange plan to make subsidiary SeAH Special Steel a wholly owned unit, after which SeAH Special Steel shares fell. It appears many investors sought to sell their SeAH Special Steel holdings in advance before receiving SeAH Holdings shares in exchange.
SeAH Holdings and SeAH Special Steel said they each held board meetings on Oct. 30 and signed a comprehensive stock exchange agreement. SeAH Holdings owns 70% equity in SeAH Special Steel and plans to issue about 318,000 new shares to exchange for the remaining SeAH Special Steel equity.
SeAH Special Steel shareholders will receive SeAH Holdings shares at an exchange ratio of 1 to 0.1348985, and SeAH Special Steel will be delisted when the exchange is completed.
After the stock exchange plan was released, SeAH Special Steel's share price fell. The drop was not large, but the stock, which topped 16,200 won on Oct. 30, fell to the 15,500-won range on the 5th before closing at 16,000 won on the 12th. Foreign selling was particularly strong. The foreign equity ratio in SeAH Special Steel fell from 1.52% on Oct. 29, the day before the plan was released, to 0.85% on the 12th of this month.
The record date for the stock exchange is on the 14th. Shareholders who do not want the exchange likely sold their shares by the 12th, two days before the record date. They can exercise appraisal rights, and the appraisal price is 16,048 won, similar to the current share price.
The stock exchange between the two companies is a relatively simple task. As both are listed, there was little controversy over valuation or the exchange ratio. Because the ratio was calculated based on market-validated share prices, there was little controversy over artificial overvaluation or undervaluation.
Even so, the decline in SeAH Special Steel's share price is seen as the result of investors weighing the pros and cons of receiving SeAH Holdings shares. Above all, investing in SeAH Special Steel, a manufacturer, and investing in SeAH Holdings, a holding company, are very different matters.
SeAH Holdings is considered an extremely undervalued stock even among holding companies. Its current PBR (price-to-book ratio) is around 0.2, and the company aims to raise it to 0.5 in two years. The free float is also very small. Including treasury shares, the largest shareholder of SeAH Holdings (including related parties) holds 83.3% equity. The company says issuing new shares will reduce this to 77.2%, but the free float will still be only in the 20% range.
The two companies' dividend policies also differ somewhat. In particular, many who invested in SeAH Special Steel shares bought them for high dividends, but after the stock exchange, dividend income is likely to decrease. Over the past five years, SeAH Special Steel's average dividend yield was 6.6%, while SeAH Holdings' average dividend yield over the same period was only 3.4%.
At the SeAH Special Steel board, regarding this stock exchange, members said, "We expect to internalize SeAH Special Steel's liquidity and revenue into SeAH Holdings and maximize synergy within the group," adding, "By unifying the listed companies, we can reduce management and operating expense and simplify the governance structure to eliminate inefficiencies such as overlapping investment."
However, it is unclear whether governance improvements will immediately lead to a rise in the share price. The SeAH Special Steel board said that, following this decision, improvements in corporate value and shareholder value are expected, but added the caveat that this is "mid- to long-term."