Samsung Group, the largest of South Korea’s chaebol conglomerates, is merging its engineering and shipbuilding units in an effort to improve management of large-scale projects, including in the Middle East.
Samsung has sometimes struggled with its big projects and has had cost overruns on jobs such as the Takreer refinery in the UAE.
The company’s merger plan is part of a broader restructuring as it prepares to hand over the reins to the next generation of its controlling family.
The plan, approved by the boards of Samsung Heavy Industries and Samsung Engineering, will be in the form of a stock swap and is expected to take effect in December.
The deal will not immediately affect an existing joint venture between Arabtec and Samsung Engineering, a Samsung spokesman said. The two companies last year formed the venture – in which Arabtec, Dubai’s largest construction company, has a 60 per cent stake and Samsung 40 per cent – with the aim of bidding together for oil and gas and power projects.
Both Samsung and Arabtec, which is part-owned by a unit of the Abu Dhabi investment vehicle International Petroleum Investment Company (Ipic), affirmed their commitment to the venture in July after a leadership shake-up in which the Arabtec chief executive, Hasan Ismaik, departed.
The merged company aims to increase sales to 40 trillion won (Dh145 billion) by 2020, up from a combined 25tn won last year.
Samsung Heavy Industries and Samsung Engineering have struggled in recent years, with share prices of both sinking sharply due to competitive pressures and large cost overruns at important projects.
Shares in Samsung Engineering had declined by about 80 per cent from the middle of 2011 to a nadir near 55,500 won at the end of last year. Its problems have included cost overruns on the $2.5 billion contract it won last year to build a carbon black and delayed coker plant for Abu Dhabi Oil Refining Company (known as Takreer) – Samsung Engineering has set aside 90bn won against losses on that project. The South Korean company has won a number of projects in the UAE in recent years, including several at the Ruwais Refinery complex.
Shares in the heavy industries unit had fallen by 44 per cent from a high near 45,000 won last October to a low of about 25,000 won this summer, following poor first-quarter results that included a 500 billion-won provision for losses at projects including the Inpex Ichthys gas development off the north-west coast of Australia and the Egina production, storage, and offloading project, operated by Total, in the Gulf of Guinea.
Park Dae-young, the chief executive of Samsung Heavy Industries, admitted this year that the large cost overruns were due to a lack of experience and capabilities in engineering, procurement, construction, and installation, as well as management shortcomings.
The company yesterday expressed optimism that the merger could address these problems.
“The two companies will be reborn as the world’s most competitive plant company based on our world-class manufacturing facilities, fabrication experience and outstanding technical manpower in the onshore and offshore businesses,” Mr Park said.
The offshore energy infrastructure industry is dominated by South Korean companies, with shipbuilding units of Daewoo and Hyundai being Samsung’s main competitors. Samsung hopes it can gain an edge over its rivals by combining engineering expertise with its shipbuilding capabilities to manage projects better.
Samsung Heavy Industries’ shares yesterday gained more than 6 per cent at 29,500 won, while Samsung Engineering gained 12.5 per cent to 71,900 won.
The merger has the broader aim of consolidating Samsung Group’s myriad divisions in preparation of management succession. Lee Kun-Hee, the chairman of Samsung Electronics and the de facto leader of the group, has been ill since he suffered a heart attack in May.
The group also plans to take private two other constituent companies, including its holding company, which is 25 per cent owned by Mr Lee’s son, Lee Jae-Yong.
The South Korean government has been pushing to disentangle the chaebols and has been offering tax incentives, including lower inheritance taxes, to groups that rationalise their structures.
amcauley@thenational.ae
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