Nam Hyun-woo has worked as a staff writer at The Korea Times since 2013, mostly covering business and politics. He currently belongs to the Business Desk where he covers topics such as emerging tech, AI, ICT and Korea's chaebol community. Prior to joining the team, he was the paper's correspondent for the presidential office of Korea during the Yoon Suk Yeol and Moon Jae-in administrations.
SK hynix faces dilemma as de facto largest Kioxia shareholder
This October 2023 photo shows the logo of Kioxia, the world's third largest manufacturer of NAND flash memory chips, at one of their sites in the city of Yokohama, Kanagawa Prefecture, Tokyo. AFP-Yonhap
By Nam Hyun-woo
SK hynix has become the de facto largest shareholder in Kioxia, the world’s third-largest NAND flash maker, but uncertainty remains over whether it can participate in the Japanese company’s management, leaving the Korean chipmaker with a valuable yet complicated strategic position.
Kioxia said in a regulatory filing on Monday that BCPE Pangea Cayman2 (SPC2) is now its largest stakeholder. SPC2 is a special purpose company established by United States private equity Bain Capital and invested by SK hynix.
Toshiba was previously Kioxia’s largest shareholder, but its stake fell to 14.12 percent from 14.48 percent as of July 31 after the Japanese company sold shares in the market last month. With SPC2 maintaining its 14.19 percent stake, it became Kioxia’s largest shareholder.
SPC2 was established by Bain Capital, but it effectively serves as an investment vehicle solely for SK hynix. In 2018, the Korean chipmaker invested about 3.9 trillion won ($2.75 billion) through two Bain Capital SPCs — 2.63 trillion won in SPC1, an equity investment vehicle, and 1.3 trillion won through SPC2 to acquire convertible bonds issued by Kioxia.
SPC1, which was led by Bain Capital, completed its exit from Kioxia in June. SK hynix did not disclose exactly how much profit it generated from the sale of its investment through SPC1, but the company said it booked nearly 6.3 trillion won in gains on investment assets in the second quarter, though most of them were unrealized gains.
If those bonds are converted into common shares, SK hynix can become the company’s largest shareholder. As the conversion can be requested at any time under the agreement, SPC2 can be seen as being effectively controlled by SK hynix.
A logo of semiconductor and memory chipmaker SK hynix is seen during the company’s Nasdaq debut in New York City, July 10. Reuters-Yonhap
According to Counterpoint Research, Samsung Electronics accounted for 29 percent of global NAND flash in the first quarter by revenue, followed by SK hynix with 18 percent and Kioxia with 14 percent. This means the world’s second- and third-largest NAND players could potentially come under the same sphere of influence.
The problem is that it may be difficult for SK hynix itself to become Kioxia’s largest shareholder. In the filing, Kioxia pointed to the possibility of conflicts of interest between competitors if SK hynix becomes its major shareholder.
Under Japanese regulations, SK hynix has to undergo a prior government review before converting the convertible bonds into shares and securing voting rights. Given that Japan is also tightening scrutiny on foreign investments that could increase control over strategic industries on economic security grounds, obtaining regulatory approval is not expected to be easy.
In addition, when SK hynix made the investment, the two sides agreed that the Korean chipmaker would not hold a stake exceeding 15 percent of Kioxia’s voting rights until 2028. Although the restriction will soon expire, any move to increase SK hynix’s stake could also face reviews by competition authorities in multiple countries.
Unloading the stake is not a desirable choice. Kioxia shares hit a record high of 112,700 yen ($706.9) in June, but have since fallen by more than 50 percent and are now trading at around 49,000 yen.
The decline came amid multiple negative factors, including Kioxia’s recent loss in a U.S. patent lawsuit against Viasat and growing concerns over a potential slowdown in the NAND flash market. Bain Capital’s exit from Kioxia in July was also perceived by the market as a negative signal.
Against this backdrop, SK Group Chairman Chey Tae-won said in a July 10 interview with Bloomberg that no decision had yet been made on whether to cash out SK hynix’s investment in Kioxia or use it as “a strategic leverage.”
“It will be difficult for SK hynix to exercise meaningful management control over Kioxia,” an industry official said. “It is more likely that the Korean chipmaker will seek to use its stake as strategic leverage in other ways.”