Samsung Biologics Announces 3 Trillion Won Rights Offering

The main purpose of the offering is to fund the acquisition of other companies' securities, with the company planning to acquire a peptide production plant located in Switzerland. The deal is seen as an example highlighting the importance of advanced technology in the bio industry, and rumors of an M&A deal had already taken shape in the market.

Its compound annual revenue growth rate (CAGR) stands at around 30%, and it has grown into a top-tier company in the global CDMO (contract development and manufacturing) market. It has established a firm position within the global top three by production volume.

Samsung Biologics' free cash flow (FCF) represents the company's surplus cash, and funding a 3 trillion won rights offering from its own cash alone would be burdensome. Cumulative FCF over the past four years is around 3 trillion won, and this year it is expected to be about 1.2 trillion won. For the acquisition funds, estimated at roughly 2.7 trillion won, various capital-raising methods such as loans, bond issuance, and share swaps may be considered.

A rights offering issues new shares, but various other capital-raising techniques also exist, such as share swaps. For example, U.S. companies like Marvell have recently used similar methods in M&A deals. Rights offerings can raise concerns about shareholder dilution, but they are considered an important part of corporate management strategy.

This rights offering decision requires Samsung Electronics and Samsung C&T, major shareholders of Samsung Biologics, to make large capital contributions. Each company would need to invest roughly 1 trillion won, so a board resolution is a mandatory procedure. This leads to the practical question of who carries the responsibility for a shareholder-targeted rights offering.

This shows that the two companies exert substantial influence as major shareholders of Samsung Biologics.

If Samsung Electronics and Samsung C&T bear the rights offering funds, part of Samsung Electronics' dividend could flow into Samsung Biologics. Samsung Electronics' dividends are based on 50% of free cash flow, so if roughly 1 trillion won is diverted to the rights offering, there is a possibility that total dividend payouts will shrink.

The analysis suggests that Samsung Biologics may prefer using funds within the group rather than paying interest through external loans or corporate bond issuance. Because Samsung Electronics and Samsung C&T hold roughly 70% as major shareholders, fund transfers between affiliates may be viewed as a reasonable choice.

This rights offering will be issued at 1.32 million won, a 15% discount to the reference price. Such a discounted issuance could spark controversy from a shareholder-return perspective. It may act as a short-term share price drop and supply burden factor, potentially provoking backlash from existing shareholders.

Discounted issuance can have a negative impact on short-term share prices.

The issue price of 1.32 million won for the new shares could affect the short-term share price. Short-term investors who acquire shares at 1.32 million won may sell to lock in profits if the price rises, so this price could act as downward pressure on the stock. It is a phenomenon where the accounting-based issue price functions as both a support and resistance level in the market.

This suggests the share price may move sideways along the rights offering schedule, which could act as a negative factor for existing shareholders.

The listing date for the new shares from the rights offering is scheduled for November 30. If this timeline holds, the share price could move sideways for about three months, from late August to late November. Sell orders to lock in profits may emerge before and after the new shares list, and certain price levels could act as a ceiling on share price gains until the listing.

Companies such as Moderna and Cloudflare have adopted this technique when issuing convertible bonds to reduce concerns about dilution. The capped call prevents market shock by having the company directly buy back shares from convertible bond investors' profit-taking sales.

Convertible bonds (CBs) offer companies the advantage of raising funds at low interest rates. However, if the share price rises sharply, investors convert to shares and profit, which can work as a weakness in the form of shareholder value dilution. Conversely, convertible bonds give investors the advantage of profiting through conversion, while companies have the disadvantage of having to lend money at low rates.

When shares are converted, the company immediately blocks the supply of shares to the market through buybacks of its own stock. This prevents large volumes of shares from flooding the market at once, thereby reducing the shock to the share price.

As seen in Moderna's case, premium-priced convertible bonds are issued at a conversion price above the current share price, protecting shareholders. For example, when the current share price is $142, the issuance terms could be set at $210 per share. This combines the return expected by bond investors with the company's strategic price cap. When a premium is applied to the conversion price, investors can only profit through conversion once the share price rises above a certain level, which helps prevent sharp share price declines caused by conversion. For the company, this offers the advantage of raising funds at low interest while managing the risk of shareholder value dilution from share price movements.