SKT-CJ deal faces regulatory risk
This is the first in a series of articles analyzing the effects on the local telecom market of SK Telecom’s proposed takeover of CJ HelloVision ― ED
Fitch Ratings says deal intended for local market
By Kim Yoo-chul
The proposed acquisition by the country’s top telecom operator, SK Telecom, of Korea’s top pay-TV provider CJ HelloVision (CJH) faces regulatory hurdles, an analyst at Fitch Ratings (Fitch) said.
“There will be some risks in completing the deal including pending regulatory approval,” Shelley Jang at Fitch said in a recent e-mail interview with The Korea Times.
Jang added that intensifying competition in the pay-TV market poses a risk to the performance of the merged entity. She declined to elaborate further.
Such remarks came ahead of a plan by the Ministry of Science, ICT and Future Planning (MSIP), the government agency which has the authority to either block or approve the deal, to hold a panel discussion in downtown Seoul Wednesday, on whether the proposed deal limits consumer choice and hurts fair market competition.
Claiming the deal is a combination of the top players in Korea’s pay-TV and telecom markets, SK Telecom’s two chief local rivals ― KT and LG Uplus ― claimed that the deal has the potential to seriously harm fair competition, asking the MSIP to nullify the proposal.
LG Uplus CEO Kwon Young-soo officially asked the MSIP to block the deal as the acquisition, if it materializes, will cost more for consumers when they watch SK-owned pay-TV programs.
SK Telecom said the proposal was intended to boost its capability to better compete with global content players such as Netflix. But Fitch said the SK-CJH deal was largely due to SK’s intent to boost local share.
“I don’t agree that acquisition of CJH should be viewed as a move to boost SK Telecom’s ability to manage international businesses. I don’t think SK Telecom is pursuing any international businesses aggressively at the moment,” Fitch analyst Jang said.
“The purpose of the acquisition of CJH is primarily to expand its market position in the local market,” she said.
Financial burden?
The credit ratings agency said it doesn’t worry too much about the financial burden that SK Telecom will face on its planned deal to acquire CJH.
But Fitch seemingly expects the slight possibility that SK will probably suffer from a deterioration of its leverage with the expected increase in investment.
“The one-off cash outflow for buying out the minorities in SK Broadband and paying the early-retirement benefit are likely to result in it reporting a slightly higher leverage ratio in 2015 compared with 2014, despite improved operating performance,” the analyst said.
“The leverage is likely to deteriorate further with an increase in investment in CJH and CJ Holding this year,” she added.
The proposed transaction will see SK Telecom initially pay 500 billion won for a 30 percent stake in CJH currently held by CJ O Shopping. The deal allows it to acquire CJ O Shopping's remaining 23.9 percent stake in CJ Hellovision at a later date through call and put options.
Upon completion, SK Telecom will push for a merger between CJH and its fixed-line unit SK Broadband via a stock swap.
But Fitch said the proposed takeover plan is generally good for SK Telecom, which seems controversial for other telecoms in terms of fair competition.
The analyst said the ratings agency believes that the acquisition is a positive move for SK Telecom to secure its position as a major player in the pay-TV market.
Fitch said the rating agency also believes the acquisition will strengthen SK Telecom’s media competitiveness, bundling ability and operating efficiency.
“Fitch believes the acquisition of CJH will create immediate synergies by expanding SK Broadband’s pay-TV subscriber base. This will boost revenue from its media business with additional sales of bundled packages and other media products,” the agency responded.
It also stressed that SK Telecom is likely to improve its operating efficiency with better content sourcing power and economies of scale, which will contribute to improvement in its long-term profitability.
“SK Telecom’s financial metrics will remain well within its current A- rating level with its leverage ratio staying below our negative rating guideline,” Jang said.