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Samsung Heavy Pulls In Samsung Engineering

NEW YORK (The Deal) -- South Korea's Samsung Heavy Industries will absorb sister company Samsung Engineering in an all-share transaction worth about 2.5 trillion won ($2.5 billion) that aims to create a single, fast-growing onshore and offshore oil and gas services business.

Under the deal terms, Samsung Engineering shareholders will be invited to swap each share for 2.36 new shares in Samsung Heavy. The exchange ratio valued Samsung Engineering shares at W63,628 each, based on Samsung Heavy's share price of W26,927. That represented a slim discount to Samsung Engineering's Friday closing price of W63,900, though sharp rises in the price of both companies' shares pushed the deal to a premium following its announcement on Monday.

"Samsung Heavy Industries will gain engineering, procurement, and project management capabilities...and establish a stable foundation for the growth of its offshore plant business," said Samsung Heavy. "Samsung Engineering, which has focused its business in onshore hydrocarbon plants, will be able to diversify into high value-added projects such as onshore LNG and offshore plants."

The merger comes amid a wider reshuffling of Samsung assets driven by a desire to cut overlapping operations and as South Korea's government steps up its efforts to dismantle the conglomerates, known as chaebols, that dominate its economy. Analysts are also watching Samsung for signs that the business could be broken up by the family of Lee Kun Hee, the company's billionaire chairman, who was hospitalized in May following a heart attack.

Cheil Industries, which houses Samsung's electronics and fashion assets and acts as the wider group's de facto holding company, is preparing for an initial public offering in 2015. That sale could raise cash to enable Lee's three children to split up the group.

A combined Samsung Heavy and Samsung Engineering would have had sales of about W25 trillion last year. Management said it hopes that the combination will drive sales to about W40 trillion by 2020. The deal will be voted on at a meeting on Oct. 27 and is expected to complete by Dec. 1.

Shares in Samsung Heavy closed on Monday at W28,950, up W1,700, or 6.2%. on their Friday close, equating to a market capitalization of W6.69 trillion. Samsung Engineering shares closed at W71,900, up W8,000, or 12.5%, leaving it with a market capitalization of W2.88 trillion.

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